Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Napco Security Technologies' (NASDAQ:NSSC) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Napco Security Technologies is:

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

0.29 = US$51m ÷ (US$195m - US$20m) (Based on the trailing twelve months to March 2024).

Therefore, Napco Security Technologies has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Electronic industry average of 11%.

In the above chart we have measured Napco Security Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Napco Security Technologies .

What Does the ROCE Trend For Napco Security Technologies Tell Us?

The trends we've noticed at Napco Security Technologies are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 162%. So we're very much inspired by what we're seeing at Napco Security Technologies thanks to its ability to profitably reinvest capital.

What We Can Learn From Napco Security Technologies' ROCE

All in all, it's terrific to see that Napco Security Technologies is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Napco Security Technologies and understanding it should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.