Beware the Port of Tauranga (NZSE:POT) and its returns on capital

If you’re looking for a multi-bagger, there are a few things to watch out for. Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. However, after investigating Port of Tauranga (NZSE:POT), we don’t think current trends fit the mold of a multi-bagger.

Return on capital employed (ROCE): what is it?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on the Port of Tauranga is:

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

0.061 = NZ$156 million ÷ (NZ$2.7 billion – NZ$183 million) (Based on the last twelve months to June 2022).

Therefore, The port of Tauranga has a ROCE of 6.1%. In absolute terms, that’s a poor return, but it’s far better than the infrastructure industry average of 4.9%.

See our latest analysis for the Port of Tauranga

NZSE: POT Return on Capital Employed October 17, 2022

Above you can see how Tauranga Port’s current ROCE compares to its past returns on capital, but there is little you can say about the past. If you want to see what analysts predict for the future, you should check out our free report for the port of Tauranga.

The ROCE trend

In terms of historical ROCE movements of the port of Tauranga, the trend is not fantastic. Over the past five years, capital returns have declined to 6.1% from 10% five years ago. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.

Similarly, the Port of Tauranga reduced its current liabilities to 6.7% of total assets. This could partly explain why ROCE fell. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now funds more of the operations with its own money.

The Key Takeaway

While yields have fallen for the Port of Tauranga in recent times, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. And the stock has followed suit, returning 58% to shareholders over the past five years. So, while investors seem to be recognizing these promising trends, we would take a closer look at this stock to make sure the other metrics justify the positive view.

If you are still interested in Tauranga Port, it is worth checking out our FREE Intrinsic Value Estimate to see if it is trading at an attractive price in other respects.

Although the Port of Tauranga does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. look at this free list here.

Valuation is complex, but we help make it simple.

Find out if Port of Tauranga is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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