What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Kanzhun (NASDAQ:BZ) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kanzhun is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = CN¥945m ÷ (CN¥19b - CN¥4.1b) (Based on the trailing twelve months to June 2024).
Thus, Kanzhun has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Interactive Media and Services industry average of 6.6%.
Above you can see how the current ROCE for Kanzhun compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kanzhun .
So How Is Kanzhun's ROCE Trending?
We're delighted to see that Kanzhun is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 6.3% which is a sight for sore eyes. Not only that, but the company is utilizing 612% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Kanzhun has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Kanzhun's ROCE
In summary, it's great to see that Kanzhun has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 69% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for BZ on our platform that is definitely worth checking out.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
