If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Although, when we looked at ZEAL Network (ETR:TIMA), it didn't seem to tick all of these boxes.

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. The formula for this calculation on ZEAL Network is:

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

0.093 = €30m ÷ (€389m - €64m) (Based on the trailing twelve months to June 2024).

So, ZEAL Network has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 4.2%.

View our latest analysis for ZEAL Network

Above you can see how the current ROCE for ZEAL Network compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ZEAL Network .

What Does the ROCE Trend For ZEAL Network Tell Us?

We're a bit concerned with the trends, because the business is applying 33% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 9.3%, it's hard to get excited about these developments.

The Key Takeaway

Overall, we're not ecstatic to see ZEAL Network reducing the amount of capital it employs in the business. Yet to long term shareholders the stock has gifted them an incredible 163% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for ZEAL Network you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.