There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, NZ Windfarms (NZSE:NWF) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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 NZ Windfarms is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = NZ$4.6m ÷ (NZ$52m - NZ$4.9m) (Based on the trailing twelve months to December 2020).
Thus, NZ Windfarms has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 5.3% generated by the Renewable Energy industry, it's much better.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how NZ Windfarms has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From NZ Windfarms' ROCE Trend?
We're pretty happy with how the ROCE has been trending at NZ Windfarms. The figures show that over the last five years, returns on capital have grown by 1,215%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, NZ Windfarms appears to been achieving more with less, since the business is using 38% less capital to run its operation. NZ Windfarms may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In a nutshell, we're pleased to see that NZ Windfarms has been able to generate higher returns from less capital. And a remarkable 221% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know about the risks facing NZ Windfarms, we've discovered 2 warning signs that you should be aware of.
While NZ Windfarms 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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