Returns On Capital At ZipRecruiter (NYSE:ZIP) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 ZipRecruiter (NYSE:ZIP), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ZipRecruiter:

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

0.12 = US$83m ÷ (US$858m - US$148m) (Based on the trailing twelve months to June 2022).

So, ZipRecruiter has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 4.4% generated by the Interactive Media and Services industry.

See our latest analysis for ZipRecruiter

Above you can see how the current ROCE for ZipRecruiter 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 ZipRecruiter here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at ZipRecruiter doesn't inspire confidence. To be more specific, ROCE has fallen from 33% over the last two years. 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.

On a related note, ZipRecruiter has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that ZipRecruiter 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 40% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

ZipRecruiter could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While ZipRecruiter 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.