Returns on Capital Paint A Bright Future For Spark New Zealand (NZSE:SPK)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Spark New Zealand (NZSE:SPK) we really liked what we saw.

What Is 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. The formula for this calculation on Spark New Zealand is:

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

0.35 = NZ$1.3b ÷ (NZ$4.5b - NZ$850m) (Based on the trailing twelve months to June 2023).

So, Spark New Zealand has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Telecom industry average of 8.3%.

See our latest analysis for Spark New Zealand

In the above chart we have measured Spark New Zealand'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 Spark New Zealand.

What Can We Tell From Spark New Zealand's ROCE Trend?

Spark New Zealand's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 95% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Spark New Zealand's ROCE

To bring it all together, Spark New Zealand has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 65% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Spark New Zealand can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Spark New Zealand, we've spotted 4 warning signs, and 2 of them are potentially serious.

Spark New Zealand is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.