The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Zebra Technologies Corporation (NASDAQ:ZBRA)’s return fundamentals and stock market performance.
Buying Zebra Technologies makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Zebra Technologies’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
Check out our latest analysis for Zebra Technologies
Zebra Technologies’s Return On Capital Employed
Choosing to invest in Zebra Technologies comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Zebra Technologies is good at growing investor capital. ZBRA’s ROCE is calculated below:
ROCE Calculation for ZBRA
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$411.0m ÷ (US$4.28b – US$1.01b) = 12.6%
As you can see, ZBRA earned $12.6 from every $100 you invested over the previous twelve months. This shows Zebra Technologies provides an uninspiring capital return that is slightly below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if ZBRA is clever with their reinvestments or dividend payments, investors can still grow their capital but may not see the same compounded performance as other high-returning companies.
A deeper look
The underperforming ROCE is not ideal for Zebra Technologies investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, ZBRA’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of ZBRA’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that ZBRA boosted investor return on capital employed from 1.0%. Similarly, the movement in the earnings variable shows a jump from US$43.6m to US$411.0m whilst capital employed has declined because of a decline in total assets and increase in current liabilities (more borrowed money) , which means that ROCE has increased as a result of Zebra Technologies’s ability to grow earnings in conjunction with increased capital efficiency.
Next Steps
ROCE for ZBRA investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for ZBRA’s future growth? Take a look at our free research report of analyst consensus for ZBRA’s outlook.
- Valuation: What is ZBRA worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether ZBRA is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.