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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Channel Infrastructure NZ (NZSE:CHI) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Channel Infrastructure NZ, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = NZ$54m ÷ (NZ$968m - NZ$36m) (Based on the trailing twelve months to June 2024).
Thus, Channel Infrastructure NZ has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.6%.
Check out our latest analysis for Channel Infrastructure NZ
Above you can see how the current ROCE for Channel Infrastructure NZ compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Channel Infrastructure NZ for free.
What Does the ROCE Trend For Channel Infrastructure NZ Tell Us?
Channel Infrastructure NZ's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 34% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
One more thing to note, Channel Infrastructure NZ has decreased current liabilities to 3.7% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On Channel Infrastructure NZ's ROCE
To bring it all together, Channel Infrastructure NZ has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 7.0% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.