There are a few key trends to look for if we want to identify the next multi-bagger. 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. And in light of that, the trends we're seeing at Zimplats Holdings' (ASX:ZIM) look very promising so lets take a look.
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)
0.35 = US$619m ÷ (US$2.0b - US$199m) (Based on the trailing twelve months to December 2020).
Therefore, 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 9.5%.
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.
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. The company was generating losses five years ago, but now it's earning 35% which is a sight for sore eyes. 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 indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Zimplats Holdings' ROCE
To the delight of most shareholders, Zimplats Holdings has now broken into profitability. And a remarkable 829% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 1 warning sign with Zimplats Holdings and understanding this should be part of your investment process.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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