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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in NovoCure's (NASDAQ:NVCR) returns on capital, so let's have a look.
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 NovoCure:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = US$7.6m ÷ (US$529m - US$85m) (Based on the trailing twelve months to June 2020).
So, NovoCure has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.1%.
In the above chart we have measured NovoCure's 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 NovoCure.
What Can We Tell From NovoCure's ROCE Trend?
The fact that NovoCure is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, NovoCure is utilizing 161% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On NovoCure's ROCE
To the delight of most shareholders, NovoCure has now broken into profitability. Since the stock has returned a staggering 456% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
NovoCure does have some risks, we noticed 5 warning signs (and 1 which is a bit concerning) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
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