Returns On Capital Are A Standout For Zimplats Holdings (ASX:ZIM)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

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 Zimplats Holdings, this is the formula:

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

0.35 = US$619m ÷ (US$2.0b - US$199m) (Based on the trailing twelve months to December 2020).

So, Zimplats Holdings has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.9%.

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

What Does the ROCE Trend For Zimplats Holdings Tell Us?

We're delighted to see that Zimplats Holdings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 35% on its capital. In addition to that, Zimplats Holdings is employing 50% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Zimplats Holdings' ROCE

To the delight of most shareholders, Zimplats Holdings has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Zimplats Holdings can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing Zimplats Holdings that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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