Yahoo Finance Verde Agritech (TSE:NPK) Is Looking To Continue Growing Its Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Verde Agritech (TSE:NPK) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Verde Agritech:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CA$604k ÷ (CA$32m - CA$4.2m) (Based on the trailing twelve months to June 2021).
Therefore, Verde Agritech has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.1%.
See our latest analysis for Verde Agritech
Historical performance is a great place to start when researching a stock so above you can see the gauge for Verde Agritech's ROCE against it's prior returns. If you're interested in investigating Verde Agritech's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Verde Agritech's ROCE Trending?
We're delighted to see that Verde Agritech is reaping rewards from its investments and has now broken into profitability. The company now earns 2.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Verde Agritech has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 13% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
What We Can Learn From Verde Agritech's ROCE
To bring it all together, Verde Agritech has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 4 warning signs we've spotted with Verde Agritech (including 1 which can't be ignored) .
While Verde Agritech 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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