Returns At Cargojet (TSE:CJT) Appear To Be Weighed Down

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Cargojet (TSE:CJT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Cargojet:

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

0.084 = CA$155m ÷ (CA$2.0b - CA$169m) (Based on the trailing twelve months to March 2023).

Thus, Cargojet has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 14%.

View 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 to see what analysts are forecasting going forward, you should check out our free report for Cargojet.

SWOT Analysis for Cargojet

The Trend Of ROCE

In terms of Cargojet's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.4% for the last five years, and the capital employed within the business has risen 217% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while Cargojet has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Cargojet does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

While Cargojet isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.