Returns Are Gaining Momentum At Zaharni Zavodi AD (BUL:ZHZA)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Zaharni Zavodi AD (BUL:ZHZA) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Zaharni Zavodi AD:

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

0.17 = лв11m ÷ (лв136m - лв75m) (Based on the trailing twelve months to June 2022).

So, Zaharni Zavodi AD has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.

Check out the opportunities and risks within the BG Food industry.

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'd like to look at how Zaharni Zavodi AD has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Zaharni Zavodi AD's ROCE Trending?

Investors would be pleased with what's happening at Zaharni Zavodi AD. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 36%. So we're very much inspired by what we're seeing at Zaharni Zavodi AD thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 55%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

To sum it up, Zaharni Zavodi AD has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Zaharni Zavodi AD we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Zaharni Zavodi AD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.