There Are Reasons To Feel Uneasy About Port of Tauranga's (NZSE:POT) Returns On Capital

Explore Port of Tauranga's Fair Values from the Community and select yours

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Port of Tauranga (NZSE:POT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding 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. To calculate this metric for Port of Tauranga, this is the formula:

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

0.068 = NZ$173m ÷ (NZ$2.9b - NZ$356m) (Based on the trailing twelve months to December 2024).

Thus, Port of Tauranga has an ROCE of 6.8%. Even though it's in line with the industry average of 6.8%, it's still a low return by itself.

Check out 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'd like, you can check out the forecasts from the analysts covering Port of Tauranga for free.

The Trend Of ROCE

When we looked at the ROCE trend at Port of Tauranga, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. However it looks like Port of Tauranga might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Port of Tauranga's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 8.9% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

While Port of Tauranga doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for POT on our platform.

While Port of Tauranga 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.

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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.