If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Northbridge Industrial Services' (LON:NBI) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Northbridge Industrial Services:

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

0.064 = UK£2.5m ÷ (UK£49m - UK£9.9m) (Based on the trailing twelve months to June 2021).

So, Northbridge Industrial Services has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 15%.

See our latest analysis for Northbridge Industrial Services

Above you can see how the current ROCE for Northbridge Industrial Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Northbridge Industrial Services here for free.

The Trend Of ROCE

It's great to see that Northbridge Industrial Services has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 6.4% which is no doubt a relief for some early shareholders. In regards to capital employed, Northbridge Industrial Services is using 31% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

The Key Takeaway

From what we've seen above, Northbridge Industrial Services has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 23% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a separate note, we've found 2 warning signs for Northbridge Industrial Services you'll probably want to know about.

While Northbridge Industrial Services 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.