We're Watching These Trends At Zapf Creation (MUN:ZPF)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at Zapf Creation (MUN:ZPF), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Zapf Creation, this is the formula:

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

0.26 = €18m ÷ (€96m - €27m) (Based on the trailing twelve months to December 2019).

So, Zapf Creation has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Leisure industry average of 16%.

View our latest analysis for Zapf Creation

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zapf Creation's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zapf Creation, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Zapf Creation doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 41%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Zapf Creation has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Zapf Creation's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zapf Creation is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 31% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing Zapf Creation, we've discovered 1 warning sign that you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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