Capital Allocation Trends At Cargojet (TSE:CJT) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Cargojet (TSE:CJT), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Cargojet is:

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

0.075 = CA$132m ÷ (CA$2.0b - CA$259m) (Based on the trailing twelve months to June 2023).

Thus, Cargojet has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Logistics industry average of 11%.

See our latest analysis for Cargojet

In the above chart we have measured Cargojet's 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 Cargojet here for free.

So How Is Cargojet's ROCE Trending?

On the surface, the trend of ROCE at Cargojet doesn't inspire confidence. To be more specific, ROCE has fallen from 9.5% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Cargojet's ROCE

Bringing it all together, while we're somewhat encouraged by Cargojet's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 7.1% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know about the risks facing Cargojet, we've discovered 3 warning signs that you should be aware of.

While Cargojet may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.