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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of New Hope (ASX:NHC) we really liked what we saw.
What Is 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. To calculate this metric for New Hope, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = AU$706m ÷ (AU$3.5b - AU$615m) (Based on the trailing twelve months to July 2024).
Therefore, New Hope has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.
View our latest analysis for New Hope
Above you can see how the current ROCE for New Hope compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for New Hope .
What Can We Tell From New Hope's ROCE Trend?
New Hope is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 63% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 18% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
In summary, we're delighted to see that New Hope has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 279% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.