ZTO Express (Cayman) (NYSE:ZTO) Has More To Do To Multiply In Value Going Forward

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at ZTO Express (Cayman)'s (NYSE:ZTO) ROCE trend, we were pretty happy with what we saw.

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)

0.15 = CN¥10b ÷ (CN¥88b - CN¥20b) (Based on the trailing twelve months to December 2023).

Thus, ZTO Express (Cayman) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Logistics industry.

Check out 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'd like, you can check out the forecasts from the analysts covering ZTO Express (Cayman) for free.

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

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 98% in that time. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From ZTO Express (Cayman)'s ROCE

To sum it up, ZTO Express (Cayman) has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 3.6% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if ZTO Express (Cayman) is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

On a separate note, we've found 1 warning sign for ZTO Express (Cayman) you'll probably want to know about.

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.