Compound share

NZME (NZSE: NZM) does what it takes to multiply its share price

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Among other things, we’ll want to see two things; first of all, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. With that in mind, we’ve noticed some promising trends at NZME (NZSE: NZM) so let’s look a little deeper.

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

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on NZME is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.15 = NZ $ 38 million ÷ (NZ $ 322 million – NZ $ 64 million) (Based on the last twelve months up to June 2021).

So, NZME has a ROCE of 15%. On its own, that’s a standard return, but it’s way better than the 11% generated by the media industry.

See our latest review for NZME

NZSE: NZM Return on capital employed on November 21, 2021

In the graph above, we measured NZME’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for NZME.

What does the ROCE trend tell us for NZME?

NZME did not disappoint when it comes to ROCE growth. We have found that returns on capital employed over the past five years have increased by 29%. This is a very favorable trend because it means the business is earning more per dollar of capital employed. Speaking of capital employed, the company is actually using 37% less than it was five years ago, which may indicate that a company is improving its efficiency. If this trend continues, the business could become more efficient, but it decreases in terms of total assets.

The result on the ROCE of NZME

In short, we are delighted to see that NZME has been able to generate higher returns with less capital. Given that the stock has returned 224% to shareholders over the past five years, it looks like investors are recognizing these changes. In light of this, we think it’s worth taking a closer look at this title because if NZME can maintain these trends, it could have a bright future ahead of it.

One last note, you should inquire about the 4 warning signs we spotted it with NZME (including 1 which is a bit unpleasant).

While NZME does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.

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

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