What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at ZoomInfo Technologies (NASDAQ:ZI), it didn't seem to tick all of these boxes.
What is 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. To calculate this metric for ZoomInfo Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$70m ÷ (US$2.5b - US$348m) (Based on the trailing twelve months to March 2021).
Therefore, ZoomInfo Technologies has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 8.1%.
In the above chart we have measured ZoomInfo Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ZoomInfo Technologies.
What Does the ROCE Trend For ZoomInfo Technologies Tell Us?
In terms of ZoomInfo Technologies' historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 5.3%, but since then they've fallen to 3.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that ZoomInfo Technologies is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 28% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.
ZoomInfo Technologies does have some risks though, and we've spotted 1 warning sign for ZoomInfo Technologies that you might be interested in.
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. 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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