Why The 23% Return On Capital At ZIM Integrated Shipping Services (NYSE:ZIM) Should Have Your Attention

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in ZIM Integrated Shipping Services' (NYSE:ZIM) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ZIM Integrated Shipping Services is:

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

0.23 = US$1.9b ÷ (US$11b - US$2.4b) (Based on the trailing twelve months to June 2023).

So, ZIM Integrated Shipping Services has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Shipping industry average of 11%.

See our latest analysis for ZIM Integrated Shipping Services

In the above chart we have measured ZIM Integrated Shipping Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ZIM Integrated Shipping Services.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at ZIM Integrated Shipping Services. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 723% more capital is being employed now too. So we're very much inspired by what we're seeing at ZIM Integrated Shipping Services thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

All in all, it's terrific to see that ZIM Integrated Shipping Services is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 42% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for ZIM Integrated Shipping Services (1 is significant) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.