We Think NVE (NASDAQ:NVEC) Might Have The DNA Of A Multi-Bagger
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. And in light of that, the trends we're seeing at NVE's (NASDAQ:NVEC) look very promising so lets take a look.
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. To calculate this metric for NVE, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$24m ÷ (US$68m - US$961k) (Based on the trailing twelve months to September 2023).
Thus, NVE has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.
View our latest analysis for NVE
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 NVE's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For NVE Tell Us?
You'd find it hard not to be impressed with the ROCE trend at NVE. The data shows that returns on capital have increased by 60% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. NVE may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
Our Take On NVE's ROCE
In a nutshell, we're pleased to see that NVE has been able to generate higher returns from less capital. Since the stock has only returned 5.6% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a final note, we've found 1 warning sign for NVE that we think you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
