Zillow Group's (NASDAQ:ZG) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Zillow Group (NASDAQ:ZG) and its trend of ROCE, we really liked what we saw.

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 Zillow Group:

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

0.046 = US$325m ÷ (US$8.8b - US$1.6b) (Based on the trailing twelve months to June 2021).

So, Zillow Group has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 7.1%.

Check out our latest analysis for Zillow Group

In the above chart we have measured Zillow Group'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 Zillow Group here for free.

The Trend Of ROCE

Zillow Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.6% which is a sight for sore eyes. In addition to that, Zillow Group is employing 144% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 19% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Zillow Group's ROCE

Long story short, we're delighted to see that Zillow Group's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Zillow Group can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 4 warning signs with Zillow Group (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Zillow Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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