ZUE (WSE:ZUE) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at ZUE (WSE:ZUE) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ZUE is:

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

0.10 = zł30m ÷ (zł780m - zł481m) (Based on the trailing twelve months to September 2024).

Therefore, ZUE has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Construction industry average it falls behind.

Check out our latest analysis for ZUE

Historical performance is a great place to start when researching a stock so above you can see the gauge for ZUE's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of ZUE.

What Can We Tell From ZUE's ROCE Trend?

We're delighted to see that ZUE is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 10% which is a sight for sore eyes. Not only that, but the company is utilizing 57% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, ZUE's current liabilities are still rather high at 62% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, it's great to see that ZUE has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 153% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if ZUE can keep these trends up, it could have a bright future ahead.

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

While ZUE 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.