Investors Will Want Zoomd Technologies' (CVE:ZOMD) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Zoomd Technologies (CVE:ZOMD) so let's look a bit deeper.

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. To calculate this metric for Zoomd Technologies, this is the formula:

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

0.00044 = US$5.0k ÷ (US$19m - US$7.9m) (Based on the trailing twelve months to March 2024).

Thus, Zoomd Technologies has an ROCE of 0.04%. Ultimately, that's a low return and it under-performs the Software industry average of 13%.

See our latest analysis for Zoomd Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Zoomd Technologies has performed in the past in other metrics, you can view this free graph of Zoomd Technologies' past earnings, revenue and cash flow.

So How Is Zoomd Technologies' ROCE Trending?

We're delighted to see that Zoomd Technologies is reaping rewards from its investments and has now broken into profitability. The company now earns 0.04% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Zoomd Technologies has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Zoomd Technologies' ROCE

To bring it all together, Zoomd Technologies has done well to increase the returns it's generating from its capital employed. However the stock is down a substantial 75% in the last three years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Zoomd Technologies and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.