Yahoo Finance We're Watching These Trends At Port of Tauranga (NZSE:POT)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Port of Tauranga (NZSE:POT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.092 = NZ$144m ÷ (NZ$1.8b - NZ$216m) (Based on the trailing twelve months to December 2019).
Therefore, Port of Tauranga has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 8.1%.
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, you can check out the forecasts from the analysts covering Port of Tauranga here for free.
What Can We Tell From Port of Tauranga's ROCE Trend?
There are better returns on capital out there than what we're seeing at Port of Tauranga. The company has consistently earned 9.2% for the last five years, and the capital employed within the business has risen 62% in that time. 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
In conclusion, Port of Tauranga has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 166% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we've found 1 warning sign for Port of Tauranga that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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