- Oops!Something went wrong.Please try again later.
There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Nova Measuring Instruments' (NASDAQ:NVMI) ROCE trend, we were pretty happy with what we saw.
Understanding 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. The formula for this calculation on Nova Measuring Instruments is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$40m ÷ (US$413m - US$46m) (Based on the trailing twelve months to March 2020).
Therefore, Nova Measuring Instruments has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.6% generated by the Semiconductor industry.
In the above chart we have a measured Nova Measuring Instruments' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nova Measuring Instruments.
What Does the ROCE Trend For Nova Measuring Instruments Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has employed 143% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Nova Measuring Instruments' ROCE
The main thing to remember is that Nova Measuring Instruments has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 297% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Nova Measuring Instruments does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...
While Nova Measuring Instruments may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.