Yahoo Finance NAHL Group (LON:NAH) Is Finding It Tricky To Allocate Its Capital
When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at NAHL Group (LON:NAH), so let's see why.
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. The formula for this calculation on NAHL Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = UK£4.0m ÷ (UK£101m - UK£22m) (Based on the trailing twelve months to December 2020).
Thus, NAHL Group has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.9%.
View our latest analysis for NAHL Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for NAHL Group's ROCE against it's prior returns. If you're interested in investigating NAHL Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For NAHL Group Tell Us?
In terms of NAHL Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 22% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on NAHL Group becoming one if things continue as they have.
Our Take On NAHL Group's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 76% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for NAHL Group (of which 1 is a bit concerning!) that you should know about.
While NAHL Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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