Did you know that certain financial measures can provide clues about a potential multi-bagger? Generally, we will want to notice a growing trend return on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. That said, from the first glance at CCN (NSE: NCC) We are not jumping from our chairs on the yield trend, but taking a closer look.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for NCC:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.13 = 7.4b Ã· (â¹ 135b – â¹ 78b) (Based on the last twelve months up to March 2021).
Therefore, NCC has a ROCE of 13%. In absolute terms, this is a satisfactory performance, but compared to the construction industry average of 9.2%, it is much better.
See our latest analysis for CNC
In the chart above, we measured NCC’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for the NCC.
So what is NCC’s ROCE trend?
There hasn’t been much to report for CNC’s returns and its level of capital employed, as both measures have remained stable over the past five years. It’s not uncommon to see this when looking at a mature, stable company that isn’t reinvesting its profits because it’s likely past that phase of the business cycle. So don’t be surprised if NCC won’t become a multi-bagger in a few years.
On a separate but related note, it’s important to know that CNC has a current liabilities to total assets ratio of 58%, which we consider to be quite high. This can lead to certain risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease as that would mean less risky bonds.
What we can learn from CNC ROCE
In a nutshell, NCC has walked with the same returns for the same amount of capital over the past five years. And since the stock has only returned 25% in the past five years to shareholders, one could argue that they are aware of these gloomy trends. Therefore, if you are looking for a multi-bagger, we suggest that you consider other options.
NCC does carry some risks, however, and we have spotted 2 warning signs for the NCC that might interest you.
Although NCC doesn’t get the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
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