Capital Allocation Trends At Zensar Technologies (NSE:ZENSARTECH) Aren't Ideal

By
Simply Wall St
Published
January 23, 2022
NSEI:ZENSARTECH
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Zensar Technologies (NSE:ZENSARTECH), 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 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 Zensar Technologies, this is the formula:

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

0.18 = ₹5.2b ÷ (₹37b - ₹8.6b) (Based on the trailing twelve months to September 2021).

So, Zensar Technologies has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Software industry.

View our latest analysis for Zensar Technologies

roce
NSEI:ZENSARTECH Return on Capital Employed January 23rd 2022

In the above chart we have measured Zensar Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zensar Technologies.

So How Is Zensar Technologies' ROCE Trending?

On the surface, the trend of ROCE at Zensar Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Zensar Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 162% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

While Zensar Technologies 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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