If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at NCR (NYSE:NCR) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for NCR:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$478m ÷ (US$9.9b - US$2.3b) (Based on the trailing twelve months to June 2020).
Thus, NCR has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Tech industry average of 8.5%.
In the above chart we have a measured NCR's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is NCR's ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 24%. So we're very much inspired by what we're seeing at NCR thanks to its ability to profitably reinvest capital.
In summary, it's great to see that NCR can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 29% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know more about NCR, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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