To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Nova Wellness Group Berhad (KLSE:NOVA), we don’t think it’s current trends fit the mold of a multi-bagger.
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. To calculate this metric for Nova Wellness Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = RM17m ÷ (RM116m – RM5.1m) (Based on the trailing twelve months to September 2022).
So, Nova Wellness Group Berhad has an ROCE of 15%. On its own, that’s a standard return, however it’s much better than the 10% generated by the Personal Products industry.
Check out our latest analysis for Nova Wellness Group Berhad
Above you can see how the current ROCE for Nova Wellness Group Berhad 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 Nova Wellness Group Berhad here for free.
So How Is Nova Wellness Group Berhad’s ROCE Trending?
When we looked at the ROCE trend at Nova Wellness Group Berhad, we didn’t gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. However it looks like Nova Wellness Group Berhad might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
To conclude, we’ve found that Nova Wellness Group Berhad is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 88% over the last three years, investors must think there’s better things to come. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
If you’d like to know more about Nova Wellness Group Berhad, we’ve spotted 3 warning signs, and 1 of them doesn’t sit too well with us.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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