ZoomInfo Technologies (NASDAQ:ZI) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at ZoomInfo Technologies (NASDAQ:ZI), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on ZoomInfo Technologies is:

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

0.029 = US$173m ÷ (US$6.7b - US$681m) (Based on the trailing twelve months to June 2024).

Therefore, ZoomInfo Technologies has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 6.6%.

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 for free.

The Trend Of ROCE

In terms of ZoomInfo Technologies' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 2.9%. However it looks like ZoomInfo Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On ZoomInfo Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by ZoomInfo Technologies' reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 84% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing ZoomInfo Technologies, we've discovered 2 warning signs that you should be aware of.

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.