In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Channel Infrastructure NZ's (NZSE:CHI) returns on capital, so let's have a 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. The formula for this calculation on Channel Infrastructure NZ is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = NZ$52m ÷ (NZ$973m - NZ$98m) (Based on the trailing twelve months to December 2023).
Thus, Channel Infrastructure NZ has an ROCE of 5.9%. On its own, that's a low figure but it's around the 6.9% average generated by the Oil and Gas industry.
See our latest analysis for Channel Infrastructure NZ
In the above chart we have measured Channel Infrastructure NZ'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 Channel Infrastructure NZ .
What Does the ROCE Trend For Channel Infrastructure NZ Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Channel Infrastructure NZ. We found that the returns on capital employed over the last five years have risen by 34%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Key Takeaway
From what we've seen above, Channel Infrastructure NZ has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.