What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we will want to see a to return to on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Therefore, when we briefly examined that of Zalando (ETR: ZAL) Trend ROCE, we were pretty happy with what we saw.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Zalando:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.12 = € 437m ÷ (€ 6.8bn – € 3.0bn) (Based on the last twelve months up to September 2021).
Thereby, Zalando has a ROCE of 12%. On its own, that’s a standard return, but it’s way better than the 5.3% generated by the online retail industry.
See our latest review for Zalando
Above you can see how Zalando’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can view Zalando’s analyst forecasts here for free.
What the ROCE trend can tell us
While the returns on capital are good, they haven’t budged much. The company has employed 172% more capital over the past five years and returns on that capital have remained stable at 12%. Since 12% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Stable returns in this basic stage can be unattractive, but if they can be sustained over the long term, they often offer nice rewards for shareholders.
Another thing to note, Zalando has a high ratio of current liabilities to total assets of 45%. This can lead to some risks as the business is basically operating with quite a lot of dependence on its suppliers or other types of short term creditors. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.
Zalando’s ROCE result
In short, Zalando simply reinvested capital regularly, at these decent rates of return. And long-term investors would be delighted with the 108% return they’ve received over the past five years. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
Zalando has risks, we noticed 2 warning signs (and 1 which is a little worrying) we think you should be aware of.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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