Stock Analysis

Here's What To Make Of Cargojet's (TSE:CJT) Decelerating Rates Of Return

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TSX:CJT
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Cargojet's (TSE:CJT) ROCE trend, we were pretty happy with what we saw.

What is 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. To calculate this metric for Cargojet, this is the formula:

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

0.11 = CA$147m ÷ (CA$1.5b - CA$128m) (Based on the trailing twelve months to September 2021).

Therefore, Cargojet has an ROCE of 11%. In isolation, that's a pretty standard return but against the Logistics industry average of 14%, it's not as good.

View our latest analysis for Cargojet

roce
TSX:CJT Return on Capital Employed February 19th 2022

Above you can see how the current ROCE for Cargojet compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cargojet here for free.

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 258% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Cargojet has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Cargojet has done well to reduce current liabilities to 8.6% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

The main thing to remember is that Cargojet has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 291% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you're still interested in Cargojet it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Cargojet is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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