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Highlights
- Zicom Group (ZGL) shows promising improvements in its Return on Capital Employed (ROCE).
- Capital employed has remained steady, while ROCE has significantly increased over the last five years.
- High current liabilities present a potential risk for Zicom Group (ZGL).
Understanding trends in a company’s Return on Capital Employed (ROCE) can help in analyzing its operational efficiency. Zicom Group (ASX:ZGL), operating within the machinery industry, has recently exhibited improvements in this metric. The trend suggests increasing efficiency in generating returns without substantial additional investments, making it a topic of interest for market observers.
What is ROCE and Why It Matters
ROCE is a measure of a company’s profitability relative to the capital it employs. It provides insights into how effectively the business generates pre-tax profits from its investments. For Zicom Group (ZGL), the calculation for ROCE is:
ROCE = EBIT ÷ (Total Assets - Current Liabilities)
Based on the trailing twelve months to June 2024:
2.1% = S$1.4 million ÷ (S$139 million - S$72 million)
This places Zicom Group's ROCE at 2.1%, which is below the industry average of 14%. While the figure may not appear high, the trend in recent years is noteworthy.
Promising ROCE Trends
Over the last five years, Zicom Group (ZGL) has kept its capital employed relatively unchanged. However, during this period, its ROCE has climbed by approximately 65%. This suggests the company has improved its operational efficiency and profitability without requiring additional investments. Such improvements in efficiency are encouraging, especially for businesses looking to enhance returns from their existing resources.
Challenges from Current Liabilities
A closer look reveals that Zicom Group (ZGL) carries high current liabilities, accounting for 51% of its total assets. This high level of reliance on short-term creditors or suppliers could pose risks, particularly in times of financial stress. Lowering these liabilities would strengthen the company’s financial position and reduce potential risks.
Zicom Group (ZGL) appears to be enhancing its efficiency, as evidenced by the rising ROCE despite stable capital employed. While this is promising, high current liabilities remain an area for improvement. Over the past five years, the stock’s decline may prompt further research into whether these operational improvements could translate into long-term growth.
Market watchers are encouraged to monitor Zicom Group (ZGL) for further developments, particularly its ability to sustain these trends and address liability concerns.
