Returns On Capital Signal Tricky Times Ahead For ZoomInfo Technologies (NASDAQ:ZI)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating ZoomInfo Technologies (NASDAQ:ZI), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ZoomInfo Technologies:

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

0.033 = US$214m ÷ (US$7.2b - US$617m) (Based on the trailing twelve months to March 2023).

So, ZoomInfo Technologies has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 8.3%.

Check out our latest analysis for ZoomInfo Technologies

Above you can see how the current ROCE for ZoomInfo Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ZoomInfo Technologies here for free.

How Are Returns Trending?

When we looked at the ROCE trend at ZoomInfo Technologies, we didn't gain much confidence. Around four years ago the returns on capital were 5.3%, but since then they've fallen to 3.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From ZoomInfo Technologies' ROCE

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. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing ZoomInfo Technologies, we've discovered 1 warning sign that you should be aware of.

While ZoomInfo Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.