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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Z Energy's (NZSE:ZEL) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
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 Z Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = NZ$294m ÷ (NZ$3.3b - NZ$1.1b) (Based on the trailing twelve months to September 2021).
Therefore, Z Energy has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 12%.
In the above chart we have measured Z Energy's 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 Z Energy here for free.
So How Is Z Energy's ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 52% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Z Energy has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
In the end, Z Energy has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 34% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
If you'd like to know more about Z Energy, we've spotted 4 warning signs, and 3 of them make us uncomfortable.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.