Will the Promising Trends At CDL Investments New Zealand (NZSE:CDI) Continue?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at CDL Investments New Zealand (NZSE:CDI) so let's look a bit deeper.

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 CDL Investments New Zealand:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = NZ$45m ÷ (NZ$244m - NZ$3.2m) (Based on the trailing twelve months to June 2020).

Thus, CDL Investments New Zealand has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 22%.

Check out our latest analysis for CDL Investments New Zealand

Historical performance is a great place to start when researching a stock so above you can see the gauge for CDL Investments New Zealand's ROCE against it's prior returns. If you're interested in investigating CDL Investments New Zealand's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

CDL Investments New Zealand is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 83% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

All in all, it's terrific to see that CDL Investments New Zealand is reaping the rewards from prior investments and is growing its capital base. And a remarkable 129% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

CDL Investments New Zealand does have some risks though, and we've spotted 1 warning sign for CDL Investments New Zealand that you might be interested in.

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.

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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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