Does Knight-Swift Transportation Holdings Inc (NYSE:KNX)'s Capital Return Make The Cut?

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Knight-Swift Transportation Holdings Inc (NYSE:KNX).

Knight-Swift Transportation Holdings stock represents an ownership share in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Knight-Swift Transportation Holdings is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Check out our latest analysis for Knight-Swift Transportation Holdings

Calculating Return On Capital Employed for KNX

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Knight-Swift Transportation Holdings’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:

As you can see, KNX earned $5.1 from every $100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which KNX has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.

A deeper look

Although Knight-Swift Transportation Holdings is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that KNX's ROCE has deteriorated from 18%, indicating the company's capital returns have declined. Over the same period, EBT went from US$174m to US$362m but capital employed has grown by a relatively larger volume because of a hike in the level of total assets , which suggests investor's ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.

Next Steps

ROCE for KNX investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate KNX or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for KNX’s future growth? Take a look at our free research report of analyst consensus for KNX’s outlook.
2. Valuation: What is KNX worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether KNX is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.