What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating South Port New Zealand (NZSE:SPN), we don’t think it’s current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 South Port New Zealand is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = NZ$16m ÷ (NZ$107m – NZ$5.0m) (Based on the trailing twelve months to December 2023).
So, South Port New Zealand has an ROCE of 16%. On its own, that’s a standard return, however it’s much better than the 4.7% generated by the Infrastructure industry.
View our latest analysis for South Port New Zealand
Historical performance is a great place to start when researching a stock so above you can see the gauge for South Port New Zealand’s ROCE against it’s prior returns. If you’d like to look at how South Port New Zealand has performed in the past in other metrics, you can view this free graph of South Port New Zealand’s past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at South Port New Zealand doesn’t inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. However it looks like South Port New Zealand might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, South Port New Zealand has decreased its current liabilities to 4.7% of total assets. So we could link some of this to the decrease in ROCE. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From South Port New Zealand’s ROCE
To conclude, we’ve found that South Port New Zealand is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
If you want to continue researching South Port New Zealand, you might be interested to know about the 3 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
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Source Link: https://finance.yahoo.com/news/south-port-zealand-nzse-spn-213537617.html
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