ZoomInfo Technologies (NASDAQ:ZI) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at ZoomInfo Technologies (NASDAQ:ZI), it didn't seem to tick all of these boxes.

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. The formula for this calculation on ZoomInfo Technologies is:

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

0.024 = US$153m ÷ (US$6.9b - US$516m) (Based on the trailing twelve months to March 2022).

So, ZoomInfo Technologies has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 5.1%.

See our latest analysis for ZoomInfo Technologies

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, you can check out the forecasts from the analysts covering ZoomInfo Technologies here for free.

What Does the ROCE Trend For ZoomInfo Technologies Tell Us?

In terms of ZoomInfo Technologies' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 2.4% from 5.3% three years ago. 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 Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ZoomInfo Technologies. However, despite the promising trends, the stock has fallen 30% over the last year, so there might be an opportunity here for astute investors. 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 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.