NZME (NZSE:NZM) Is Doing The Right Things To Multiply Its Share Price

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at NZME (NZSE:NZM) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on NZME is:

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

0.15 = NZ$38m ÷ (NZ$322m - NZ$64m) (Based on the trailing twelve months to June 2021).

So, NZME has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Media industry.

View our latest analysis for NZME

In the above chart we have measured NZME's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NZME.

What Does the ROCE Trend For NZME Tell Us?

NZME has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 29%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line On NZME's ROCE

In a nutshell, we're pleased to see that NZME has been able to generate higher returns from less capital. Since the stock has returned a staggering 224% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if NZME can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with NZME (including 1 which is a bit unpleasant) .

While NZME 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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