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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Kanzhun (NASDAQ:BZ) so let's look a bit deeper.
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 Kanzhun, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = CN¥1.0b ÷ (CN¥19b - CN¥4.0b) (Based on the trailing twelve months to September 2024).
Thus, Kanzhun has an ROCE of 6.8%. On its own, that's a low figure but it's around the 6.0% average generated by the Interactive Media and Services industry.
See our latest analysis for Kanzhun
In the above chart we have measured Kanzhun's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kanzhun for free.
How Are Returns Trending?
The fact that Kanzhun is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 6.8% which is a sight for sore eyes. Not only that, but the company is utilizing 442% more capital than before, but that's to be expected from a company 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
In Conclusion...
Overall, Kanzhun gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 52% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.