Are ZTO Express (Cayman) Inc.’s (NYSE:ZTO) Returns On Investment Worth Your While?
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Today we'll evaluate ZTO Express (Cayman) Inc. (NYSE:ZTO) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for ZTO Express (Cayman):
0.13 = CN¥4.4b ÷ (CN¥40b - CN¥5.7b) (Based on the trailing twelve months to March 2019.)
So, ZTO Express (Cayman) has an ROCE of 13%.
See our latest analysis for ZTO Express (Cayman)
Is ZTO Express (Cayman)'s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see ZTO Express (Cayman)'s ROCE is around the 11% average reported by the Logistics industry. Separate from ZTO Express (Cayman)'s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
ZTO Express (Cayman)'s current ROCE of 13% is lower than 3 years ago, when the company reported a 20% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how ZTO Express (Cayman)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for ZTO Express (Cayman).
ZTO Express (Cayman)'s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
ZTO Express (Cayman) has total assets of CN¥40b and current liabilities of CN¥5.7b. As a result, its current liabilities are equal to approximately 14% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On ZTO Express (Cayman)'s ROCE
This is good to see, and with a sound ROCE, ZTO Express (Cayman) could be worth a closer look. There might be better investments than ZTO Express (Cayman) out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like ZTO Express (Cayman) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
