Investors Shouldn't Overlook Zaharni Zavodi AD's (BUL:ZHZA) Impressive Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Zaharni Zavodi AD's (BUL:ZHZA) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Zaharni Zavodi AD, this is the formula:

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

0.43 = лв39m ÷ (лв154m - лв64m) (Based on the trailing twelve months to March 2023).

So, Zaharni Zavodi AD has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Food industry average of 8.8%.

Check out our latest analysis for Zaharni Zavodi AD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zaharni Zavodi AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zaharni Zavodi AD, check out these free graphs here.

SWOT Analysis for Zaharni Zavodi AD

What Does the ROCE Trend For Zaharni Zavodi AD Tell Us?

Zaharni Zavodi AD has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 43% on its capital. In addition to that, Zaharni Zavodi AD is employing 125% 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.

One more thing to note, Zaharni Zavodi AD has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Zaharni Zavodi AD has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Zaharni Zavodi AD's ROCE

To the delight of most shareholders, Zaharni Zavodi AD has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 12% to shareholders. So with that in mind, we think the stock deserves further research.

If you'd like to know more about Zaharni Zavodi AD, we've spotted 4 warning signs, and 3 of them don't sit too well with us.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.