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Is Nexa Resources (NYSE:NEXA) Likely To Turn Things Around?

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Simply Wall St
·3 min read
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at Nexa Resources (NYSE:NEXA), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Nexa Resources:

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

0.034 = US$137m ÷ (US$4.8b - US$783m) (Based on the trailing twelve months to September 2020).

So, Nexa Resources has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.8%.

View our latest analysis for Nexa Resources

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In the above chart we have measured Nexa Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Nexa Resources here for free.

What The Trend Of ROCE Can Tell Us

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 24% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Bottom Line On Nexa Resources' ROCE

It's a shame to see that Nexa Resources is effectively shrinking in terms of its capital base. And in the last three years, the stock has given away 53% 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.

Nexa Resources does have some risks though, and we've spotted 1 warning sign for Nexa Resources that you might be interested in.

While Nexa Resources isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.