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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. 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 Port of Tauranga (NZSE:POT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. The formula for this calculation on Port of Tauranga is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = NZ$154m ÷ (NZ$2.8b - NZ$344m) (Based on the trailing twelve months to December 2023).
Thus, Port of Tauranga has an ROCE of 6.2%. In absolute terms, that's a low return, but it's much better than the Infrastructure industry average of 3.8%.
Check out our latest analysis for Port of Tauranga
In the above chart we have measured Port of Tauranga's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Port of Tauranga .
The Trend Of ROCE
On the surface, the trend of ROCE at Port of Tauranga doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 6.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Port of Tauranga's ROCE
Bringing it all together, while we're somewhat encouraged by Port of Tauranga's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.