ZTO Express (Cayman) (NYSE:ZTO) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think ZTO Express (Cayman) (NYSE:ZTO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. 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)

0.12 = CN¥7.7b ÷ (CN¥79b - CN¥16b) (Based on the trailing twelve months to December 2022).

Thus, ZTO Express (Cayman) has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Logistics industry average of 15%.

Check out 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).

SWOT Analysis for ZTO Express (Cayman)

The Trend Of ROCE

When we looked at the ROCE trend at ZTO Express (Cayman), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

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 72% over the last five 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.

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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.