Returns On Capital At ZoomerMedia (CVE:ZUM) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at ZoomerMedia (CVE:ZUM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for ZoomerMedia:

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

0.059 = CA$4.3m ÷ (CA$88m - CA$14m) (Based on the trailing twelve months to November 2021).

Thus, ZoomerMedia has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Media industry average of 9.6%.

See our latest analysis for ZoomerMedia

Historical performance is a great place to start when researching a stock so above you can see the gauge for ZoomerMedia's ROCE against it's prior returns. If you'd like to look at how ZoomerMedia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is ZoomerMedia's ROCE Trending?

There are better returns on capital out there than what we're seeing at ZoomerMedia. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 5.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On ZoomerMedia's ROCE

Long story short, while ZoomerMedia has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 58% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

ZoomerMedia does have some risks though, and we've spotted 5 warning signs for ZoomerMedia that you might be interested in.

While ZoomerMedia may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.