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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Spark New Zealand (NZSE:SPK) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Spark New Zealand, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = NZ$636m ÷ (NZ$4.6b - NZ$1.1b) (Based on the trailing twelve months to June 2024).
Thus, Spark New Zealand has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 10% generated by the Telecom industry.
See our latest analysis for Spark New Zealand
Above you can see how the current ROCE for Spark New Zealand 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 Spark New Zealand .
So How Is Spark New Zealand's ROCE Trending?
There hasn't been much to report for Spark New Zealand's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Spark New Zealand to be a multi-bagger going forward. On top of that you'll notice that Spark New Zealand has been paying out a large portion (120%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
The Bottom Line
In a nutshell, Spark New Zealand has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Spark New Zealand has the makings of a multi-bagger.