ZTO Express (Cayman) (NYSE:ZTO) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on ZTO Express (Cayman) is:

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

0.097 = CN¥4.8b ÷ (CN¥61b - CN¥11b) (Based on the trailing twelve months to June 2021).

So, ZTO Express (Cayman) has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Logistics industry average of 12%.

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'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?

When we looked at the ROCE trend at ZTO Express (Cayman), we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. 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

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. Furthermore the stock has climbed 99% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we found 2 warning signs for ZTO Express (Cayman) (1 is a bit concerning) you should be aware of.

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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.

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