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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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Zimplats Holdings (ASX:ZIM), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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)
0.03 = US$69m ÷ (US$2.5b - US$269m) (Based on the trailing twelve months to December 2024).
So, Zimplats Holdings has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.3%.
Check out our latest analysis for Zimplats Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zimplats Holdings' ROCE against it's prior returns. If you'd like to look at how Zimplats Holdings has performed in the past in other metrics, you can view this free graph of Zimplats Holdings' past earnings, revenue and cash flow.
What Does the ROCE Trend For Zimplats Holdings Tell Us?
On the surface, the trend of ROCE at Zimplats Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
To conclude, we've found that Zimplats Holdings is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 57% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.