Why We Like The Returns At Zoomd Technologies (CVE:ZOMD)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, the ROCE of Zoomd Technologies (CVE:ZOMD) looks great, so lets see what the trend can tell us.

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)

0.23 = US$3.0m ÷ (US$22m - US$9.0m) (Based on the trailing twelve months to June 2024).

Thus, Zoomd Technologies has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Software industry average of 16%.

View our latest analysis for Zoomd Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zoomd Technologies' ROCE against it's prior returns. If you're interested in investigating Zoomd Technologies' past further, check out this free graph covering 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 23% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Zoomd Technologies has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 41% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

To bring it all together, Zoomd Technologies has done well to increase the returns it's generating from its capital employed. Given the stock has declined 49% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Zoomd Technologies, we've spotted 2 warning signs, and 1 of them is potentially serious.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.