Zenvia's (NASDAQ:ZENV) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Zenvia (NASDAQ:ZENV) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Zenvia is:

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

0.037 = R$43m ÷ (R$1.8b - R$691m) (Based on the trailing twelve months to September 2024).

Thus, Zenvia has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.9%.

See our latest analysis for Zenvia

In the above chart we have measured Zenvia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Zenvia .

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 540%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Zenvia's earnings and if they change as a result from the capital raise.

Our Take On Zenvia's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Zenvia. But since the stock has dived 72% in the last three years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One final note, you should learn about the 4 warning signs we've spotted with Zenvia (including 1 which is significant) .

While Zenvia 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.