Yahoo Finance Norwegian Cruise Line Holdings' (NYSE:NCLH) Returns Have Hit A Wall
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Norwegian Cruise Line Holdings (NYSE:NCLH), it didn't seem to tick all of these boxes.
What Is 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. The formula for this calculation on Norwegian Cruise Line Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$1.1b ÷ (US$20b - US$6.6b) (Based on the trailing twelve months to March 2024).
Therefore, Norwegian Cruise Line Holdings has an ROCE of 8.6%. On its own, that's a low figure but it's around the 9.5% average generated by the Hospitality industry.
See our latest analysis for Norwegian Cruise Line Holdings
Above you can see how the current ROCE for Norwegian Cruise Line 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 Norwegian Cruise Line Holdings for free.
What Can We Tell From Norwegian Cruise Line Holdings' ROCE Trend?
Things have been pretty stable at Norwegian Cruise Line Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Norwegian Cruise Line Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than8.6% because total capital employed would be higher.The 8.6% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
The Key Takeaway
We can conclude that in regards to Norwegian Cruise Line Holdings' returns on capital employed and the trends, there isn't much change to report on. Moreover, since the stock has crumbled 72% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Like most companies, Norwegian Cruise Line Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
While Norwegian Cruise Line Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
