Returns On Capital Are Showing Encouraging Signs At Nanosonics (ASX:NAN)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Nanosonics (ASX:NAN) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Nanosonics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = AU$18m ÷ (AU$220m - AU$33m) (Based on the trailing twelve months to June 2023).
Therefore, Nanosonics has an ROCE of 9.5%. On its own, that's a low figure but it's around the 9.3% average generated by the Medical Equipment industry.
Check out our latest analysis for Nanosonics
In the above chart we have measured Nanosonics' 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 analyst report for Nanosonics .
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 92% more capital is being employed now too. So we're very much inspired by what we're seeing at Nanosonics thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that Nanosonics is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 25% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for NAN that compares the share price and estimated value.
While Nanosonics 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.
