Capital Allocation Trends At Zen Technologies (NSE:ZENTEC) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Zen Technologies (NSE:ZENTEC), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Zen Technologies, this is the formula:

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

0.016 = ₹33m ÷ (₹2.2b - ₹83m) (Based on the trailing twelve months to December 2020).

Thus, Zen Technologies has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.0%.

Check out our latest analysis for Zen Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zen Technologies' ROCE against it's prior returns. If you'd like to look at how Zen Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Zen Technologies' ROCE Trending?

In terms of Zen Technologies' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 3.7%, but since then they've fallen to 1.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Zen Technologies has done well to pay down its current liabilities to 3.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Zen Technologies' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Zen Technologies have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Zen Technologies does come with some risks, and we've found 4 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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