For this what trends should we look for we want to identify those stocks which can multiply in value in the long term? In a perfect world, we would like to see a company investing more capital in its business and ideally increasing the return earned on that capital. Simply put, these types of businesses are compounding machines, meaning they are reinvesting their earnings at a consistently high-rate of return. However after checking 5n more (TSE: VNP), we do not think that the current trend fits the mold of a multi-bagger.
Understanding Return on Capital Employed (ROCE)
In case you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) that a company generates from capital employed in its business. Analysts use this formula to calculate it for 5N Plus:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.04 = US$11m ÷ (US$348m – US$63m) (Based on last 12 months till December 2022),
Therefore, 5N Plus’s RoCE is 4.0%. In absolute terms, this is a low return and underperforms the chemical industry average of 13%.
Check out our latest analysis for the 5N Plus
Above you can see how the current ROCE for 5N Plus compares to its past return on capital, but you can only tell so much from the past. If you’re interested, you can check out the analysts’ predictions in our Free Reports on analyst forecasts for the company.
What can we say from 5nPlus’ ROCE trends?
In terms of 5N Plus’s historical ROCE volatility, the trend isn’t spectacular. Over the past five years, the return on capital has declined to 4.0% from 11% five years ago. While both capital employed and revenue have increased, it appears that the business is currently developing as a result of short term returns. If these investments prove to be successful, it could bode very well for long-term stock performance.
Bottom-line
Even though return on capital has fallen in the short term, we find it promising that both revenue and capital employed have increased for the 5N Plus. These trends are beginning to be recognized by investors as the stock has delivered 13% gains to shareholders over the past five years. So this stock could still be an attractive investment opportunity if other fundamentals prove to be sound.
If you want to continue researching 5N Plus, you may be interested to know about 1 warning sign that our analysis revealed.
While 5N Plus may not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. check it out Free list here.
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This Simply Wall St article is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account 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 Street has no position in any of the stocks mentioned.
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