Be Wary Of ZUULtd (TSE:4387) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating ZUULtd (TSE:4387), 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. Analysts use this formula to calculate it for ZUULtd:

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

0.03 = JP¥221m ÷ (JP¥12b - JP¥4.6b) (Based on the trailing twelve months to September 2024).

Thus, ZUULtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 14%.

Check out our latest analysis for ZUULtd

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

So How Is ZUULtd's ROCE Trending?

On the surface, the trend of ROCE at ZUULtd doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 3.0%. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, ZUULtd's current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From ZUULtd's ROCE

To conclude, we've found that ZUULtd is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching ZUULtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

While ZUULtd 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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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.