The Returns At Napier Port Holdings (NZSE:NPH) Aren't Growing

By
Simply Wall St
Published
May 03, 2021
NZSE:NPH
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Napier Port Holdings (NZSE:NPH) and its ROCE trend, we weren't exactly thrilled.

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 Napier Port Holdings is:

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

0.079 = NZ$29m ÷ (NZ$385m - NZ$21m) (Based on the trailing twelve months to September 2020).

Therefore, Napier Port Holdings has an ROCE of 7.9%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.

Check out our latest analysis for Napier Port Holdings

roce
NZSE:NPH Return on Capital Employed May 3rd 2021

Above you can see how the current ROCE for Napier Port Holdings 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.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Napier Port Holdings. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 24% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Napier Port Holdings' ROCE

In summary, Napier Port Holdings has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 19% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Napier Port Holdings does have some risks though, and we've spotted 1 warning sign for Napier Port Holdings that you might be interested in.

While Napier Port Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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