Novanta's (NASDAQ:NOVT) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Novanta (NASDAQ:NOVT), we don't think it's current trends fit the mold of a multi-bagger.

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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. The formula for this calculation on Novanta is:

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

0.096 = US$128m ÷ (US$1.5b - US$182m) (Based on the trailing twelve months to June 2025).

So, Novanta has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Electronic industry average of 11%.

Check out our latest analysis for Novanta

Above you can see how the current ROCE for Novanta compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Novanta .

So How Is Novanta's ROCE Trending?

The returns on capital haven't changed much for Novanta in recent years. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 82% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Novanta's ROCE

Long story short, while Novanta has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 7.9% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Novanta does have some risks though, and we've spotted 2 warning signs for Novanta that you might be interested in.

While Novanta 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.

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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.