What are the early trends to look for to identify a stock that could multiply in value over the long term? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Therefore, when we looked at ROCE trends at NEUCA (WSE:NEU), we liked what we saw.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for NEUCA, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = zł269m ÷ (zł4.3b – zł3.1b) (Based on the last twelve months to June 2022).
Therefore, NEUCA has a ROCE of 22%. In itself, this is a very good return and it is on par with the returns obtained by companies in a similar sector.
Our analysis indicates that The NEU is potentially overvalued!
Above, you can see how NEUCA’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What does NEUCA’s ROCE trend tell us?
We would rather be satisfied with returns on capital like NEUCA. The company has employed 86% more capital over the past five years, and the return on that capital has remained stable at 22%. Now considering the ROCE is an attractive 22%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Something else to note, NEUCA has a high ratio of current liabilities to total assets of 72%. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
The essentials of NEUCA’s ROCE
NEUCA has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted with. On top of that, the stock has rewarded shareholders with a remarkable 143% return for those who have held it over the past five years. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
Although NEUCA looks impressive, no company is worth an infinite price. The intrinsic value infographic of our free The research report helps to visualize if NEU is currently trading at a fair price.
If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
Valuation is complex, but we help make it simple.
Find out if NEUCA is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.