Here’s what concerns NCC capital returns (STO: NCC B)
If we are looking to avoid a declining business, what are the trends that can give us advance warning? Generally, we will see the trend of both come back on capital employed (ROCE) falling and this usually coincides with a falling amount capital employed. Ultimately, this means that the company earns less per dollar invested and, in addition, it reduces its employed capital base. That said, after a quick look, CNC (STO:NCC B) we are not filled with optimism, but are researching further.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for NCC:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = kr1.7b ÷ (kr28b – kr15b) (Based on the last twelve months to March 2022).
Thereby, CNC has a ROCE of 13%. That’s a relatively normal return on capital, and it’s around the 12% generated by the construction industry.
See our latest analysis for NCC
Above, you can see how NCC’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want, you can check out forecasts from analysts covering NCC here for free.
The ROCE trend
As for CNC’s historical ROCE movements, the trend does not inspire confidence. About five years ago, the return on capital was 18%, but now it is significantly lower than what we saw above. In addition to this, it should be noted that the amount of capital used within the company remained relatively stable. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their margins from the competition. So, because these trends are generally not conducive to the creation of a multi-bagger, we wouldn’t hold our breath for NCC to become one if things continue as they have.
Incidentally, the NCC’s current liabilities are still quite high at 54% of total assets. This may entail certain risks, since the business is essentially dependent on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
Our view on CNC’s ROI
Overall, lower returns from the same amount of capital employed are not exactly signs of a compounding machine. Long-term shareholders who have held the shares for the past five years have experienced a 40% depreciation in their investment, so it looks like the market might not like these trends either. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.
If you want to know more about CNC, we spotted 2 warning signs, and 1 of them doesn’t sit very well with us.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.