There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of National World (LON:NWOR) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for National World:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.31 = UK£10m ÷ (UK£54m – UK£20m) (Based on the trailing twelve months to December 2022).
Therefore, National World has an ROCE of 31%. In absolute terms that’s a great return and it’s even better than the Interactive Media and Services industry average of 24%.
See our latest analysis for National World
In the above chart we have measured National World’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering National World here for free.
So How Is National World’s ROCE Trending?
The fact that National World is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it’s earning 31% which is a sight for sore eyes. Not only that, but the company is utilizing 316% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 37% of its operations, which isn’t ideal. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take On National World’s ROCE
In summary, it’s great to see that National World has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 19% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we’ve spotted 3 warning signs facing National World that you might find interesting.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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