Some Investors May Be Worried About ZTO Express (Cayman)'s (NYSE:ZTO) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at ZTO Express (Cayman) (NYSE:ZTO) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for ZTO Express (Cayman):

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

0.10 = CN¥5.0b ÷ (CN¥60b - CN¥11b) (Based on the trailing twelve months to March 2021).

Therefore, ZTO Express (Cayman) has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Logistics industry.

See our latest analysis for ZTO Express (Cayman)

Above you can see how the current ROCE for ZTO Express (Cayman) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ZTO Express (Cayman).

So How Is ZTO Express (Cayman)'s ROCE Trending?

In terms of ZTO Express (Cayman)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On ZTO Express (Cayman)'s ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ZTO Express (Cayman). Furthermore the stock has climbed 44% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing ZTO Express (Cayman) we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

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. 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.
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