Yahoo Finance Natuzzi (NYSE:NTZ) Is Experiencing Growth In Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Natuzzi (NYSE:NTZ) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 Natuzzi is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = €5.6m ÷ (€399m - €195m) (Based on the trailing twelve months to September 2022).
Thus, Natuzzi has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 17%.
See our latest analysis for Natuzzi
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Natuzzi's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Natuzzi has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 2.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Natuzzi has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
On a side note, Natuzzi's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In summary, we're delighted to see that Natuzzi has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 16% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, Natuzzi does come with some risks, and we've found 2 warning signs that you should be aware of.
While Natuzzi isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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