To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. And in light of that, the trends we're seeing at Zimplats Holdings' (ASX:ZIM) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Zimplats Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$635m ÷ (US$2.4b - US$149m) (Based on the trailing twelve months to June 2022).
Therefore, Zimplats Holdings has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 10.0%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Zimplats Holdings' ROCE against it's prior returns. If you're interested in investigating Zimplats Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Zimplats Holdings' ROCE Trending?
Zimplats Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 28%. The amount of capital employed has increased too, by 82%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Zimplats Holdings' ROCE
All in all, it's terrific to see that Zimplats Holdings is reaping the rewards from prior investments and is growing its capital base. And a remarkable 549% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 2 warning signs facing Zimplats Holdings that you might find interesting.
Zimplats Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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