Our Take On The Returns On Capital At Freightways (NZSE:FRE)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Freightways (NZSE:FRE), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Freightways is:

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

0.11 = NZ$94m ÷ (NZ$1.1b - NZ$159m) (Based on the trailing twelve months to June 2020).

Thus, Freightways has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 7.8% 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Freightways Tell Us?

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 11% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

Our Take On Freightways' ROCE

To conclude, we've found that Freightways is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 126% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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. 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.
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