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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Zimplats Holdings (ASX:ZIM), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zimplats Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$100m ÷ (US$2.4b - US$217m) (Based on the trailing twelve months to December 2023).
Therefore, Zimplats Holdings has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.
Check out our latest analysis for Zimplats Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Zimplats Holdings.
What Does the ROCE Trend For Zimplats Holdings Tell Us?
In terms of Zimplats Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On Zimplats Holdings' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Zimplats Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 211%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.