Returns On Capital Signal Tricky Times Ahead For Cargojet (TSE:CJT)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Cargojet:

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

0.039 = CA$67m ÷ (CA$1.9b - CA$150m) (Based on the trailing twelve months to March 2024).

Therefore, Cargojet has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 8.6%.

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're interested, you can view the analysts predictions in our free analyst report for Cargojet .

What Can We Tell From Cargojet's ROCE Trend?

In terms of Cargojet's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.0% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Cargojet have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Cargojet does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.