In This Article:
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for South Port New Zealand (NZSE:SPN), we aren't jumping out of our chairs because returns are decreasing.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for South Port New Zealand:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = NZ$15m ÷ (NZ$69m - NZ$9.6m) (Based on the trailing twelve months to June 2021).
Thus, South Port New Zealand has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Infrastructure industry average of 7.3%.
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're interested in investigating South Port New Zealand's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of South Port New Zealand's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 31% where it was five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, South Port New Zealand is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 95% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.