Some Investors May Be Worried About NCS Multistage Holdings' (NASDAQ:NCSM) Returns On Capital
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into NCS Multistage Holdings (NASDAQ:NCSM), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on NCS Multistage Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0099 = US$1.2m ÷ (US$141m - US$18m) (Based on the trailing twelve months to March 2023).
Therefore, NCS Multistage Holdings has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 9.8%.
See our latest analysis for NCS Multistage Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating NCS Multistage Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE at NCS Multistage Holdings is showing some signs of weakness. The company used to generate 3.0% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 71% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
The Bottom Line
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 93% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we've found 1 warning sign for NCS Multistage Holdings that we think you should be aware of.
While NCS Multistage Holdings 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.
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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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