Napco Security Technologies (NASDAQ:NSSC) Has More To Do To Multiply In Value Going Forward
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Napco Security Technologies' (NASDAQ:NSSC) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Napco Security Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$16m ÷ (US$131m - US$19m) (Based on the trailing twelve months to December 2021).
So, Napco Security Technologies has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.
Check out our latest analysis for Napco Security Technologies
Above you can see how the current ROCE for Napco Security Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Napco Security Technologies.
What Does the ROCE Trend For Napco Security Technologies Tell Us?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 104% more capital into its operations. Since 15% 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 Napco Security Technologies' ROCE
The main thing to remember is that Napco Security Technologies has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 301% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Napco Security Technologies does have some risks though, and we've spotted 2 warning signs for Napco Security Technologies that you might be interested in.
While Napco Security Technologies 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.
