Here's What's Concerning About ZTO Express (Cayman)'s (NYSE:ZTO) Returns On Capital

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. Although, when we looked at ZTO Express (Cayman) (NYSE:ZTO), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ZTO Express (Cayman) is:

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

0.12 = CN¥7.3b ÷ (CN¥78b - CN¥18b) (Based on the trailing twelve months to September 2022).

So, ZTO Express (Cayman) has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Logistics industry.

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.

What Can We Tell From ZTO Express (Cayman)'s ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 17% five years ago, while capital employed has grown 189%. Usually this isn't ideal, but given ZTO Express (Cayman) conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with ZTO Express (Cayman)'s earnings and if they change as a result from the capital raise.

The Bottom Line On ZTO Express (Cayman)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ZTO Express (Cayman) is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 81% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

While ZTO Express (Cayman) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.