New Century Resources (ASX:NCZ) Might Have The Makings Of A Multi-Bagger
If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, New Century Resources (ASX:NCZ) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for New Century Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = AU$39m ÷ (AU$487m - AU$155m) (Based on the trailing twelve months to December 2021).
Therefore, New Century Resources has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Metals and Mining industry.
See our latest analysis for New Century Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for New Century Resources' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of New Century Resources, check out these free graphs here.
So How Is New Century Resources' ROCE Trending?
The fact that New Century Resources is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. Not only that, but the company is utilizing 16,087% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that New Century Resources has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On New Century Resources' ROCE
In summary, it's great to see that New Century Resources has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 79% in the last three years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One more thing to note, we've identified 1 warning sign with New Century Resources and understanding it should be part of your investment process.
While New Century Resources 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.