Has New Zealand King Salmon Investments Limited (NZSE:NZK) Been Employing Capital Shrewdly?

Simply Wall St

Today we are going to look at New Zealand King Salmon Investments Limited (NZSE:NZK) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 New Zealand King Salmon Investments:

0.08 = NZ$16m ÷ (NZ$222m - NZ$22m) (Based on the trailing twelve months to June 2019.)

Therefore, New Zealand King Salmon Investments has an ROCE of 8.0%.

See our latest analysis for New Zealand King Salmon Investments

Does New Zealand King Salmon Investments Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see New Zealand King Salmon Investments's ROCE is around the 8.0% average reported by the Food industry. Setting aside the industry comparison for now, New Zealand King Salmon Investments'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.

New Zealand King Salmon Investments's current ROCE of 8.0% is lower than 3 years ago, when the company reported a 17% ROCE. So investors might consider if it has had issues recently. The image below shows how New Zealand King Salmon Investments's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NZSE:NZK Past Revenue and Net Income, January 19th 2020

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for New Zealand King Salmon Investments.

Do New Zealand King Salmon Investments's Current Liabilities Skew 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

New Zealand King Salmon Investments has total assets of NZ$222m and current liabilities of NZ$22m. Therefore its current liabilities are equivalent to approximately 10.0% of its total assets. New Zealand King Salmon Investments reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On New Zealand King Salmon Investments's ROCE

Based on this information, New Zealand King Salmon Investments appears to be a mediocre business. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

New Zealand King Salmon Investments is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.