U.S. markets open in 2 hours 57 minutes
  • S&P Futures

    3,768.50
    -25.50 (-0.67%)
     
  • Dow Futures

    30,140.00
    -170.00 (-0.56%)
     
  • Nasdaq Futures

    11,540.75
    -83.00 (-0.71%)
     
  • Russell 2000 Futures

    1,754.60
    -13.40 (-0.76%)
     
  • Crude Oil

    87.63
    -0.13 (-0.15%)
     
  • Gold

    1,724.20
    +3.40 (+0.20%)
     
  • Silver

    20.63
    +0.09 (+0.42%)
     
  • EUR/USD

    0.9885
    +0.0001 (+0.01%)
     
  • 10-Yr Bond

    3.7590
    0.0000 (0.00%)
     
  • Vix

    29.23
    +0.16 (+0.55%)
     
  • GBP/USD

    1.1258
    -0.0063 (-0.56%)
     
  • USD/JPY

    144.7410
    +0.1310 (+0.09%)
     
  • BTC-USD

    20,117.92
    +0.85 (+0.00%)
     
  • CMC Crypto 200

    457.13
    -1.27 (-0.28%)
     
  • FTSE 100

    7,016.43
    -36.19 (-0.51%)
     
  • Nikkei 225

    27,311.30
    +190.80 (+0.70%)
     

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

·2 min read

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at ZTO Express (Cayman) (NYSE:ZTO) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for ZTO Express (Cayman):

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).

Therefore, ZTO Express (Cayman) has an ROCE of 9.7%. On its own, that's a low figure but it's around the 12% average generated by the Logistics industry.

See our latest analysis for ZTO Express (Cayman)

roce
roce

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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 9.7% from 22% five years ago. 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.

The Key Takeaway

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 77% over the last three 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 3 warning signs for ZTO Express (Cayman) (1 is a bit unpleasant) you should be aware of.

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.

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.

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