Yahoo Finance Returns On Capital At Port of Tauranga (NZSE:POT) Have Hit The Brakes
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, 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)
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 Port of Tauranga:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = NZ$132m ÷ (NZ$1.9b - NZ$390m) (Based on the trailing twelve months to December 2020).
Therefore, Port of Tauranga has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Infrastructure industry average of 7.0%.
See 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 report for Port of Tauranga.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Port of Tauranga. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 8.9%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Port of Tauranga's ROCE
Long story short, while Port of Tauranga has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 116% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing to note, we've identified 1 warning sign with Port of Tauranga and understanding this should be part of your investment process.
While Port of Tauranga may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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