If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Ultimately, this demonstrates that this is a company that reinvests its profits at increasing rates of return. However, after briefly reviewing the numbers, we don’t think ZTO Express (Cayman) (NYSE: ZTO) has the makings of a multi-bagger going forward, but let’s see why it may be.

What is Return on Employee Capital (ROCE)?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for ZTO Express (Cayman), here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.10 = CN ¥ 5.0b ÷ (CN ¥ 61b – CN ¥ 13b) (Based on the last twelve months up to September 2021).

Therefore, ZTO Express (Cayman) has a ROCE of 10%. On its own, that’s a pretty standard return, but compared to the logistics industry average of 13%, it’s not as good.

NYSE: ZTO Return on Capital Employed December 7, 2021

Above you can see how ZTO Express (Cayman) ‘s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

What does the ROCE trend tell us for ZTO Express (Cayman)?

When we looked at the ROCE trend at ZTO Express (Cayman Islands), we didn’t gain much confidence. About five years ago, returns on capital were 25%, but since then they have fallen to 10%. Although, as both income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore shareholders, will benefit in the long run.

Our opinion on the ROCE of ZTO Express (Cayman)

While returns on capital have declined in the short term, we find promise that both revenue and capital employed have increased for ZTO Express (Cayman). And the stock has performed incredibly well with a return of 125% over the past five years, so long-term investors are no doubt delighted with the result. So if these growth trends continue, we would be optimistic about the future of the title.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for ZTO Express (Cayman) (of which 1 is of concern!) that you should know.

If you want to look for solid businesses with great income, check out this free list of companies with good balance sheets and impressive returns on equity.

Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.