What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Although, when we looked at Nisun International Enterprise Development Group (NASDAQ:NISN), it didn’t seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nisun International Enterprise Development Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = US$6.6m ÷ (US$125m – US$62m) (Based on the trailing twelve months to June 2020).
Therefore, Nisun International Enterprise Development Group has an ROCE of 10%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 9.6%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating Nisun International Enterprise Development Group’s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Nisun International Enterprise Development Group Tell Us?
Unfortunately, the trend isn’t great with ROCE falling from 32% five years ago, while capital employed has grown 327%. However, some of the increase in capital employed could be attributed to the recent capital raising that’s been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven’t been put to work yet so it’s worth watching what happens in the future with Nisun International Enterprise Development Group’s earnings and if they change as a result from the capital raise.
On a separate but related note, it’s important to know that Nisun International Enterprise Development Group has a current liabilities to total assets ratio of 50%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nisun International Enterprise Development Group. And long term investors must be optimistic going forward because the stock has returned a huge 949% to shareholders in the last three years. So should these growth trends continue, we’d be optimistic on the stock going forward.
One final note, you should learn about the 3 warning signs we’ve spotted with Nisun International Enterprise Development Group (including 1 which is significant) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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