ZTO Express (Cayman) (NYSE:ZTO) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at ZTO Express (Cayman) (NYSE:ZTO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.11 = CN¥5.5b ÷ (CN¥63b - CN¥13b) (Based on the trailing twelve months to December 2021).

Therefore, ZTO Express (Cayman) has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 14% generated by the Logistics industry.

View 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, you can check out the forecasts from the analysts covering ZTO Express (Cayman) here for free.

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

We weren't thrilled with the trend because ZTO Express (Cayman)'s ROCE has reduced by 21% over the last five years, while the business employed 150% more capital. That being said, ZTO Express (Cayman) raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence ZTO Express (Cayman) might not have received a full period of earnings contribution from it.

Our Take 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 done incredibly well with a 103% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in ZTO Express (Cayman) it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While ZTO Express (Cayman) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.