Capital Allocation Trends At Freightways (NZSE:FRE) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Freightways (NZSE:FRE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Freightways:

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

0.15 = NZ$127m ÷ (NZ$1.1b - NZ$221m) (Based on the trailing twelve months to December 2021).

So, Freightways has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 11% it's much better.

View our latest analysis for Freightways

Above you can see how the current ROCE for Freightways compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Freightways.

So How Is Freightways' ROCE Trending?

When we looked at the ROCE trend at Freightways, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Freightways' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Freightways. Furthermore the stock has climbed 86% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Freightways does come with some risks, and we've found 2 warning signs that you should be aware of.

While Freightways 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.