Nordic Group (SGX:MR7) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Nordic Group's (SGX:MR7) trend of ROCE, we liked what we saw.

What Is 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. The formula for this calculation on Nordic Group is:

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

0.18 = S$23m ÷ (S$250m - S$121m) (Based on the trailing twelve months to June 2023).

Thus, Nordic Group has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 3.8% it's much better.

See our latest analysis for Nordic Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nordic Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Nordic Group, check out these free graphs here.

What Can We Tell From Nordic Group's ROCE Trend?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 37% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that Nordic Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Nordic Group has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Nordic Group's ROCE

The main thing to remember is that Nordic Group has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 7.0% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Nordic Group that you might find interesting.

While Nordic Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.