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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 NCS Multistage Holdings' (NASDAQ:NCSM) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for NCS Multistage Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$4.3m ÷ (US$153m - US$25m) (Based on the trailing twelve months to December 2024).
Thus, NCS Multistage Holdings has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 9.9%.
View our latest analysis for NCS Multistage Holdings
Above you can see how the current ROCE for NCS Multistage Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NCS Multistage Holdings for free.
What Does the ROCE Trend For NCS Multistage Holdings Tell Us?
We're delighted to see that NCS Multistage Holdings is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 30%. This could potentially mean that the company is selling some of its assets.
The Bottom Line
From what we've seen above, NCS Multistage Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. In light of that, we think it's worth looking further into this stock because if NCS Multistage Holdings can keep these trends up, it could have a bright future ahead.