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Capital Allocation Trends At ZTO Express (Cayman) (NYSE:ZTO) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating ZTO Express (Cayman) (NYSE:ZTO), we don't think it's current trends fit the mold of a multi-bagger.

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)

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

Thus, ZTO Express (Cayman) has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Logistics industry.

View our latest analysis for ZTO Express (Cayman)

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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 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?

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. Usually this isn't ideal, but given ZTO Express (Cayman) conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with ZTO Express (Cayman)'s earnings and if they change as a result from the capital raise.

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

While returns have fallen for ZTO Express (Cayman) in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 100% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.