Will The ROCE Trend At NZ Windfarms (NZSE:NWF) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at NZ Windfarms (NZSE:NWF) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on NZ Windfarms is:

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

0.10 = NZ$5.3m ÷ (NZ$54m - NZ$3.7m) (Based on the trailing twelve months to June 2020).

So, NZ Windfarms has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 2.5% generated by the Renewable Energy industry.

Check out our latest analysis for NZ Windfarms

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for NZ Windfarms' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of NZ Windfarms, check out these free graphs here.

So How Is NZ Windfarms' ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at NZ Windfarms. The data shows that returns on capital have increased by 2,480% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, NZ Windfarms appears to been achieving more with less, since the business is using 32% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Key Takeaway

In the end, NZ Windfarms has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 149% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if NZ Windfarms can keep these trends up, it could have a bright future ahead.

Like most companies, NZ Windfarms does come with some risks, and we've found 4 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.

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. 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.

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