Returns On Capital Signal Tricky Times Ahead For ZoomInfo Technologies (NASDAQ:ZI)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at ZoomInfo Technologies (NASDAQ:ZI) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ZoomInfo Technologies is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.025 = US$164m ÷ (US$7.1b - US$518m) (Based on the trailing twelve months to September 2022).

Therefore, ZoomInfo Technologies has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 5.2%.

Check out our latest analysis for ZoomInfo Technologies

roce

In the above chart we have measured ZoomInfo Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ZoomInfo Technologies here for free.

So How Is ZoomInfo Technologies' ROCE Trending?

When we looked at the ROCE trend at ZoomInfo Technologies, we didn't gain much confidence. Around three years ago the returns on capital were 4.5%, but since then they've fallen to 2.5%. 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.

What We Can Learn From ZoomInfo Technologies' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ZoomInfo Technologies. And there could be an opportunity here if other metrics look good too, because the stock has declined 52% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, ZoomInfo Technologies does come with some risks, and we've found 1 warning sign that 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.

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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.

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