Why You Should Care About National Research's (NASDAQ:NRC) Strong Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at National Research (NASDAQ:NRC), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for National Research:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.46 = US$40m ÷ (US$122m - US$36m) (Based on the trailing twelve months to December 2023).
Thus, National Research has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 10%.
See our latest analysis for National Research
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 want to delve into the historical earnings, revenue and cash flow of National Research, check out these free graphs here.
The Trend Of ROCE
We'd be pretty happy with returns on capital like National Research. Over the past five years, ROCE has remained relatively flat at around 46% and the business has deployed 42% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 30% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
In summary, we're delighted to see that National Research has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 8.8% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if National Research is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
One final note, you should learn about the 3 warning signs we've spotted with National Research (including 1 which doesn't sit too well with us) .
National Research is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
