Yahoo Finance Is Napier Port Holdings Limited’s (NZSE:NPH) 8.8% Return On Capital Employed Good News?
Today we'll evaluate Napier Port Holdings Limited (NZSE:NPH) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Napier Port Holdings:
0.088 = NZ$28m ÷ (NZ$332m - NZ$13m) (Based on the trailing twelve months to September 2018.)
Therefore, Napier Port Holdings has an ROCE of 8.8%.
Check out our latest analysis for Napier Port Holdings
Is Napier Port Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Napier Port Holdings's ROCE is fairly close to the Infrastructure industry average of 8.8%. Aside from the industry comparison, Napier Port Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
The image below shows how Napier Port Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Napier Port Holdings.
Napier Port Holdings's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Napier Port Holdings has total assets of NZ$332m and current liabilities of NZ$13m. As a result, its current liabilities are equal to approximately 3.9% of its total assets. With low levels of current liabilities, at least Napier Port Holdings's mediocre ROCE is not unduly boosted.
Our Take On Napier Port Holdings's ROCE
Napier Port Holdings looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than Napier Port Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
