Hindustan Zinc (NSE:HINDZINC) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Hindustan Zinc's (NSE:HINDZINC) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Hindustan Zinc:

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

0.34 = ₹133b ÷ (₹447b - ₹61b) (Based on the trailing twelve months to March 2022).

Thus, Hindustan Zinc has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

See our latest analysis for Hindustan Zinc

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

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Hindustan Zinc. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 34%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Hindustan Zinc's ROCE

In summary, it's great to see that Hindustan Zinc 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. Considering the stock has delivered 31% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Hindustan Zinc does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.