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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? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, New Zealand King Salmon Investments (NZSE:NZK) 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. The formula for this calculation on New Zealand King Salmon Investments is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = NZ$24m ÷ (NZ$272m - NZ$34m) (Based on the trailing twelve months to December 2019).
Thus, New Zealand King Salmon Investments has an ROCE of 9.9%. On its own that's a low return, but compared to the average of 7.5% generated by the Food industry, it's much better.
In the above chart we have a measured New Zealand King Salmon Investments' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.9%. The amount of capital employed has increased too, by 178%. So we're very much inspired by what we're seeing at New Zealand King Salmon Investments thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 12%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
Our Take On New Zealand King Salmon Investments' ROCE
To sum it up, New Zealand King Salmon Investments has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 18% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
While New Zealand King Salmon Investments looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NZK is currently trading for a fair price.
While New Zealand King Salmon Investments isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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