Here's What To Make Of ZTO Express (Cayman)'s (NYSE:ZTO) Decelerating Rates Of Return

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at ZTO Express (Cayman)'s (NYSE:ZTO) ROCE trend, we were pretty happy with what we saw.

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

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. To calculate this metric for ZTO Express (Cayman), this is the formula:

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

0.15 = CN¥9.7b ÷ (CN¥87b - CN¥21b) (Based on the trailing twelve months to September 2023).

Therefore, ZTO Express (Cayman) has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Logistics industry average of 13%.

See our latest analysis for ZTO Express (Cayman)

In the above chart we have measured ZTO Express (Cayman)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 99% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that ZTO Express (Cayman) has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 24% of total assets, this reported ROCE would probably be less than15% because total capital employed would be higher.The 15% ROCE could be even lower if current liabilities weren't 24% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Key Takeaway

The main thing to remember is that ZTO Express (Cayman) has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 37% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know about the risks facing ZTO Express (Cayman), we've discovered 1 warning sign that you should be aware of.

While ZTO Express (Cayman) 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.