The Returns On Capital At ZUULtd (TSE:4387) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 ZUULtd (TSE:4387), 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. The formula for this calculation on ZUULtd is:

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

0.022 = JP¥115m ÷ (JP¥9.3b - JP¥4.2b) (Based on the trailing twelve months to March 2024).

So, ZUULtd has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 16%.

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're interested in investigating ZUULtd's past further, check out this free graph covering ZUULtd's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at ZUULtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.2% from 18% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, ZUULtd's current liabilities have increased over the last five years to 45% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.2%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In summary, we're somewhat concerned by ZUULtd's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 68% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

ZUULtd does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While ZUULtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com