Yahoo Finance Returns on Capital Paint A Bright Future For Verde AgriTech (TSE:NPK)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Verde AgriTech's (TSE:NPK) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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)
0.41 = CA$20m ÷ (CA$66m - CA$16m) (Based on the trailing twelve months to June 2022).
Therefore, Verde AgriTech has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.
Check out 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 The Trend Of ROCE Can Tell Us
The fact that Verde AgriTech is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 41% which is a sight for sore eyes. Not only that, but the company is utilizing 96% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take On 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 a remarkable 623% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Verde AgriTech does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Verde AgriTech is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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