Zephyrus Wing Energies (TLV:ZPRS) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zephyrus Wing Energies (TLV:ZPRS), we don't think it's current trends fit the mold of a multi-bagger.

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 Zephyrus Wing Energies:

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

0.058 = ₪85m ÷ (₪1.6b - ₪134m) (Based on the trailing twelve months to June 2024).

Therefore, Zephyrus Wing Energies has an ROCE of 5.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 3.5%.

Check out our latest analysis for Zephyrus Wing Energies

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

What Can We Tell From Zephyrus Wing Energies' ROCE Trend?

In terms of Zephyrus Wing Energies' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 5.8% from 7.3% three years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Zephyrus Wing Energies has decreased its current liabilities to 8.4% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Zephyrus Wing Energies have fallen, meanwhile the business is employing more capital than it was three years ago. It should come as no surprise then that the stock has fallen 27% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zephyrus Wing Energies (of which 1 is a bit unpleasant!) that you should know about.

While Zephyrus Wing Energies 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.