Port of Tauranga (NZSE:POT) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Port of Tauranga (NZSE:POT), it didn't seem to tick all of these boxes.

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 Port of Tauranga is:

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

0.065 = NZ$170m ÷ (NZ$2.8b - NZ$221m) (Based on the trailing twelve months to June 2023).

Therefore, Port of Tauranga has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 3.8% generated by the Infrastructure industry, it's much better.

View our latest analysis for Port of Tauranga

In the above chart we have measured Port of Tauranga's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Port of Tauranga, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.5% from 9.6% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Port of Tauranga has done well to pay down its current liabilities to 7.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Port of Tauranga is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Port of Tauranga does have some risks though, and we've spotted 1 warning sign for Port of Tauranga 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. 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.