What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Napier Port Holdings (NZSE:NPH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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. Analysts use this formula to calculate it for Napier Port Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = NZ$29m ÷ (NZ$380m - NZ$19m) (Based on the trailing twelve months to March 2020).
Therefore, Napier Port Holdings has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.1%.
See our latest analysis for Napier Port Holdings
In the above chart we have measured Napier Port Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Napier Port Holdings' ROCE Trending?
In terms of Napier Port Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has employed 29% more capital in the last five years, and the returns on that capital have remained stable at 8.1%. 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.
In conclusion, Napier Port Holdings has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 13% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing to note, we've identified 1 warning sign with Napier Port Holdings and understanding it should be part of your investment process.
While Napier Port Holdings 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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