Yahoo Finance Investors Will Want Verde AgriTech's (TSE:NPK) Growth In ROCE To Persist
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Verde AgriTech (TSE:NPK) 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. Analysts use this formula to calculate it for Verde AgriTech:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = CA$1.4m ÷ (CA$96m - CA$11m) (Based on the trailing twelve months to September 2023).
Therefore, Verde AgriTech has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.3%.
View our latest analysis for Verde AgriTech
Above you can see how the current ROCE for Verde AgriTech compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Verde AgriTech here for free.
What Can We Tell From Verde AgriTech's ROCE Trend?
The fact that Verde AgriTech is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.7% on its capital. In addition to that, Verde AgriTech is employing 264% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Verde AgriTech's ROCE
Long story short, we're delighted to see that Verde AgriTech's reinvestment activities have paid off and the company is now profitable. And with a respectable 92% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
Verde AgriTech does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
