Be Wary Of Zimplats Holdings (ASX:ZIM) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Zimplats Holdings (ASX:ZIM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on Zimplats Holdings is:

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%.

View 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're interested in investigating Zimplats Holdings' past further, check out this free graph covering Zimplats Holdings' past earnings, revenue and cash flow.

What Can We Tell From Zimplats Holdings' ROCE Trend?

In terms of Zimplats Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.5% from 12% five years ago. 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.

What We Can Learn From Zimplats Holdings' ROCE

In summary, we're somewhat concerned by Zimplats Holdings' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 220%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Zimplats Holdings, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.