Why The 44% Return On Capital At Hindustan Zinc (NSE:HINDZINC) Should Have Your Attention

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. And in light of that, the trends we're seeing at Hindustan Zinc's (NSE:HINDZINC) look very promising so lets take a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.44 = ₹151b ÷ (₹425b - ₹83b) (Based on the trailing twelve months to December 2022).

Therefore, Hindustan Zinc has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 15%.

Check out 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.

SWOT Analysis for Hindustan Zinc

The Trend Of ROCE

Hindustan Zinc's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 48% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Key Takeaway

To bring it all together, Hindustan Zinc has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 70% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for Hindustan Zinc that we think you should be aware of.

Hindustan Zinc is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.