Advance ZincTek (ASX:ANO) Will Want To Turn Around Its Return Trends
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Advance ZincTek (ASX:ANO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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. Analysts use this formula to calculate it for Advance ZincTek:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = AU$2.4m ÷ (AU$39m - AU$1.9m) (Based on the trailing twelve months to June 2023).
Thus, Advance ZincTek has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.7%.
Check out our latest analysis for Advance ZincTek
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Advance ZincTek has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Advance ZincTek, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Advance ZincTek's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Advance ZincTek is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 7.4% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Advance ZincTek does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are concerning...
While Advance ZincTek 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.
