Zamp (BVMF:ZAMP3) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think Zamp (BVMF:ZAMP3) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Zamp:

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

0.028 = R$89m ÷ (R$4.0b - R$851m) (Based on the trailing twelve months to September 2022).

Therefore, Zamp has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.0%.

See our latest analysis for Zamp

Above you can see how the current ROCE for Zamp compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zamp here for free.

What The Trend Of ROCE Can Tell Us

In terms of Zamp's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.8% from 4.9% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Zamp's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zamp is reinvesting for growth and has higher sales as a result. But since the stock has dived 71% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

Zamp does have some risks though, and we've spotted 1 warning sign for Zamp that you might be interested in.

While Zamp 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.