Returns On Capital - An Important Metric For Zimplats Holdings (ASX:ZIM)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Zimplats Holdings' (ASX:ZIM) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.24 = US$380m ÷ (US$1.7b - US$121m) (Based on the trailing twelve months to June 2020).

Thus, Zimplats Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.3%.

See 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 want to delve into the historical earnings, revenue and cash flow of Zimplats Holdings, check out these free graphs here.

The Trend Of ROCE

Investors would be pleased with what's happening at Zimplats Holdings. Over the last five years, returns on capital employed have risen substantially to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 38% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

In summary, it's great to see that Zimplats Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 472% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Zimplats Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

Zimplats Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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