Nu-World Holdings (JSE:NWL) Could Be Struggling To Allocate Capital

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at Nu-World Holdings (JSE:NWL) and its ROCE trend, we weren’t exactly thrilled.

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. Analysts use this formula to calculate it for Nu-World Holdings:

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

0.067 = R102m ÷ (R1.7b – R137m) (Based on the trailing twelve months to August 2022).

Therefore, Nu-World Holdings has an ROCE of 6.7%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 9.6%.

Check out our latest analysis for Nu-World Holdings

Above you can see how the current ROCE for Nu-World Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Nu-World Holdings.

The Trend Of ROCE

On the surface, the trend of ROCE at Nu-World Holdings doesn’t inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Nu-World Holdings has decreased its current liabilities to 8.2% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we’ve found that Nu-World Holdings is reinvesting in the business, but returns have been falling. Additionally, the stock’s total return to shareholders over the last five years has been flat, which isn’t too surprising. Therefore based on the analysis done in this article, we don’t think Nu-World Holdings has the makings of a multi-bagger.

One final note, you should learn about the 6 warning signs we’ve spotted with Nu-World Holdings (including 2 which make us uncomfortable) .

While Nu-World Holdings 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.