ZOO Digital Group (LON:ZOO) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, ZOO Digital Group (LON:ZOO) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for ZOO Digital Group, this is the formula:

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

0.19 = US$8.1m ÷ (US$64m - US$22m) (Based on the trailing twelve months to March 2023).

Thus, ZOO Digital Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 9.0% it's much better.

See our latest analysis for ZOO Digital Group

In the above chart we have measured ZOO Digital Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is ZOO Digital Group's ROCE Trending?

The trends we've noticed at ZOO Digital Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 272%. So we're very much inspired by what we're seeing at ZOO Digital Group thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that ZOO Digital Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 66% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 3 warning signs we've spotted with ZOO Digital Group (including 1 which doesn't sit too well with us) .

While ZOO Digital Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.