Returns At Novabase S.G.P.S (FRA:NVQ) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Novabase S.G.P.S (FRA:NVQ) looks quite promising in regards to its trends of return on capital.

Understanding 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 Novabase S.G.P.S is:

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

0.067 = €7.5m ÷ (€177m - €65m) (Based on the trailing twelve months to December 2023).

So, Novabase S.G.P.S has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 8.8%.

Check out our latest analysis for Novabase S.G.P.S

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Novabase S.G.P.S' ROCE against it's prior returns. If you're interested in investigating Novabase S.G.P.S' past further, check out this free graph covering Novabase S.G.P.S' past earnings, revenue and cash flow.

What Can We Tell From Novabase S.G.P.S' ROCE Trend?

Novabase S.G.P.S' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 72% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that Novabase S.G.P.S has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Novabase S.G.P.S we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Novabase S.G.P.S 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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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.