If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 CSX (NASDAQ:CSX) 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)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for CSX:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$4.3b ÷ (US$40b - US$1.8b) (Based on the trailing twelve months to March 2021).
Thus, CSX has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Transportation industry.
In the above chart we have measured CSX's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CSX.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at CSX, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if CSX doesn't end up being a multi-bagger in a few years time.
The Key Takeaway
In summary, CSX isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 260% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
CSX does have some risks though, and we've spotted 2 warning signs for CSX that you might be interested in.
While CSX isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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