There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, NZME (NZSE:NZM) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for NZME, this is the formula:

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

0.11 = NZ$25m ÷ (NZ$290m - NZ$62m) (Based on the trailing twelve months to December 2023).

So, NZME has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 9.1% it's much better.

See our latest analysis for NZME

In the above chart we have measured NZME's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for NZME .

What Does the ROCE Trend For NZME Tell Us?

NZME has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 65%. The company is now earning NZ$0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 44% less than it was five years ago, which can be indicative of a business that's improving its efficiency. NZME may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On NZME's ROCE

In the end, NZME has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 202% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if NZME can keep these trends up, it could have a bright future ahead.

NZME does have some risks though, and we've spotted 2 warning signs for NZME that you might be interested in.

While NZME isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.