Zanlakol (TLV:ZNKL) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Zanlakol (TLV:ZNKL) and its ROCE trend, we weren't exactly thrilled.

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 Zanlakol:

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

0.18 = ₪34m ÷ (₪329m - ₪135m) (Based on the trailing twelve months to June 2022).

So, Zanlakol has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Food industry.

Check out the opportunities and risks within the IL Food industry.

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

So How Is Zanlakol's ROCE Trending?

Over the past five years, Zanlakol's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Zanlakol doesn't end up being a multi-bagger in a few years time.

On a side note, Zanlakol's current liabilities are still rather high at 41% of total assets. 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 Key Takeaway

In summary, Zanlakol isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 67% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Zanlakol does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning...

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

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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.