Assessing the impact of economic shocks on the Novozymes A/S share price

A question on the minds of many investors right now is how economic uncertainty will continue to affect large cap companies, such as Novozymes A/S (CPH:NZYM B).

Shares in Novozymes A/S are currently trading at DKK452.4. But to assess whether the price is likely to fall or rally over the next 12 months, we need an objective way of telling whether it's able to withstand economic shocks. To do that, it's worth looking at the profile of the stock to see where its strengths are.

Importantly, we're interested in finding impartial ways of looking at Novozymes A/S – something that takes emotion out of the analysis...

Promisingly, there is evidence that it scores well against some important financial and technical measures. In particular, it shows signs of being a high quality, strong momentum stock.

Research shows that high quality stocks tend to be resilient, cash-generating businesses that can compound investment returns over time. Likewise, strong momentum in price and earnings can be a pointer to positive trends that have the potential to continue.

Here's why these factors matter:

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Why quality can pay off

When it comes to stock analysis, company quality tends to be revealed in high profitability and strong industry-leading margins. These kinds of firms are stable, growing and often have accelerating sales and earnings. They also have strong and improving financial histories with no obvious signs of accountancy or bankruptcy risk.

One of the quality metrics for Novozymes A/S is its 5-year Return on Capital Employed, which is 25.2%. Long-term, double-digit ROCEs can be a hallmark of companies with the power to grow very profitably.

Harnessing the power of momentum

Positive momentum trends show up in share prices and earnings growth. You can find the clues in stocks that are trading close to their 52 week high prices and outperforming the market. They’ll often be beating broker estimates and getting forecast upgrades and recommendation changes.

There are signs of this at Novozymes A/S, where the share price has seen a 6.11% return relative to the market over the past 12 months. Market volatility and economic uncertainty can be a major drag on momentum, but previously strong stocks can be quick to recover when confidence returns.

Overall, a combination of strong quality and momentum can be clues in the search for shares with the potential to deliver solid investment profits over many years.

In good times, these shares can become expensive to buy. But in volatile markets, there may be chances to buy them at cheaper prices.

What does this mean for potential investors?

Finding good quality stocks with strong momentum behind them is a strategy used by some of the world's most successful investors. But be warned: these factors don't guarantee future returns and we've identified some areas of concern with Novozymes A/S that you can find out about here.