Be Wary Of Advance ZincTek (ASX:ANO) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Advance ZincTek (ASX:ANO), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Advance ZincTek:

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

0.10 = AU$3.9m ÷ (AU$38m - AU$1.0m) (Based on the trailing twelve months to June 2022).

So, Advance ZincTek has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 4.0% generated by the Chemicals industry.

View our latest analysis for Advance ZincTek

Historical performance is a great place to start when researching a stock so above you can see the gauge for Advance ZincTek's ROCE against it's prior returns. If you're interested in investigating Advance ZincTek's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Advance ZincTek's ROCE Trending?

On the surface, the trend of ROCE at Advance ZincTek doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Advance ZincTek. And the stock has done incredibly well with a 802% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Advance ZincTek does have some risks though, and we've spotted 1 warning sign for Advance ZincTek that you might be interested in.

While Advance ZincTek may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.