There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 New Zealand King Salmon Investments (NZSE:NZK) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for New Zealand King Salmon Investments, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = NZ$22m ÷ (NZ$274m - NZ$28m) (Based on the trailing twelve months to June 2020).
Therefore, New Zealand King Salmon Investments has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Food industry average of 7.1%.
Above you can see how the current ROCE for New Zealand King Salmon Investments compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is New Zealand King Salmon Investments' ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.1%. The amount of capital employed has increased too, by 151%. 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 10%, 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.
All in all, it's terrific to see that New Zealand King Salmon Investments is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 19% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
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.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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