Zen Technologies (NSE:ZENTEC) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Zen Technologies' (NSE:ZENTEC) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Zen Technologies:

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

0.37 = ₹1.2b ÷ (₹4.7b - ₹1.4b) (Based on the trailing twelve months to June 2023).

Thus, Zen Technologies has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Electronic industry average of 13%.

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.

What Can We Tell From Zen Technologies' ROCE Trend?

We like the trends that we're seeing from Zen Technologies. The data shows that returns on capital have increased substantially over the last five years to 37%. Basically the business is earning more per dollar of capital invested and in addition to that, 171% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

In summary, it's great to see that Zen Technologies 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. And a remarkable 845% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 3 warning signs for Zen Technologies (2 are a bit concerning) you should be aware of.

Zen Technologies 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.