NVC International Holdings (HKG:2222) Shareholders Will Want The ROCE Trajectory To Continue

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. With that in mind, we've noticed some promising trends at NVC International Holdings (HKG:2222) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for NVC International Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0029 = US$1.5m ÷ (US$580m - US$71m) (Based on the trailing twelve months to June 2024).

Thus, NVC International Holdings has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 11%.

See our latest analysis for NVC International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for NVC International Holdings' ROCE against it's prior returns. If you'd like to look at how NVC International Holdings has performed in the past in other metrics, you can view this free graph of NVC International Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that NVC International Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 12%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

To sum it up, NVC International Holdings is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 62% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 2 warning signs for NVC International Holdings that we think you should be aware of.

While NVC International Holdings 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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