Returns on Capital Paint A Bright Future For Mainfreight (NZSE:MFT)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Mainfreight (NZSE:MFT) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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 Mainfreight:

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

0.24 = NZ$510m ÷ (NZ$3.0b - NZ$901m) (Based on the trailing twelve months to March 2022).

Thus, Mainfreight has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Mainfreight

In the above chart we have measured Mainfreight'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 report on analyst forecasts for the company.

How Are Returns Trending?

We like the trends that we're seeing from Mainfreight. The data shows that returns on capital have increased substantially over the last five years to 24%. The amount of capital employed has increased too, by 122%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Mainfreight's ROCE

To sum it up, Mainfreight has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 251% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Mainfreight can keep these trends up, it could have a bright future ahead.

While Mainfreight looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MFT is currently trading for a fair price.

Mainfreight is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.