If you're looking for a multi-bagger, there's a few things to keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Natuzzi (NYSE:NTZ) so let's look a bit deeper.

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 Natuzzi, this is the formula:

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

0.0064 = €1.2m ÷ (€383m - €195m) (Based on the trailing twelve months to March 2021).

Thus, Natuzzi has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 15%.

Check out 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'd like to look at how Natuzzi has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Natuzzi Tell Us?

Natuzzi has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 0.6% 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Natuzzi's ROCE

To sum it up, Natuzzi is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 122% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Natuzzi can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Natuzzi, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Natuzzi 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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