Investors Could Be Concerned With Advance ZincTek's (ASX:ANO) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Advance ZincTek, this is the formula:

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

0.041 = AU$1.5m ÷ (AU$40m - AU$2.7m) (Based on the trailing twelve months to December 2023).

Therefore, Advance ZincTek has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

See 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'd like to look at how Advance ZincTek has performed in the past in other metrics, you can view this free graph of Advance ZincTek's past earnings, revenue and cash flow.

What Does the ROCE Trend For Advance ZincTek Tell Us?

On the surface, the trend of ROCE at Advance ZincTek doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like Advance ZincTek might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

In summary, Advance ZincTek is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 73% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Advance ZincTek (of which 1 is a bit unpleasant!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.