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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Mainfreight's (NZSE:MFT) look very promising so lets take a look.

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 Mainfreight is:

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).

So, Mainfreight has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Logistics industry average of 14%.

Our analysis indicates that MFT is potentially undervalued!

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.

So How Is Mainfreight's ROCE Trending?

We like the trends that we're seeing from Mainfreight. Over the last five years, returns on capital employed have risen substantially to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 122%. So we're very much inspired by what we're seeing at Mainfreight thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that Mainfreight is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

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.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.