Is There More Growth In Store For Zen Technologies' (NSE:ZENTEC) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Zen Technologies (NSE:ZENTEC) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Zen Technologies, this is the formula:

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

0.16 = ₹330m ÷ (₹2.1b - ₹133m) (Based on the trailing twelve months to June 2020).

So, Zen Technologies has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 9.2% it's much better.

See our latest analysis for Zen Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zen Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zen Technologies, check out these free graphs here.

The Trend Of ROCE

Investors would be pleased with what's happening at Zen Technologies. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 74%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Zen Technologies has decreased current liabilities to 6.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Zen Technologies has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Zen Technologies' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Zen Technologies has. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Zen Technologies, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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