Returns On Capital At Covenant Logistics Group (NASDAQ:CVLG) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Covenant Logistics Group (NASDAQ:CVLG), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Covenant Logistics Group, this is the formula:

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

0.076 = US$48m ÷ (US$765m - US$139m) (Based on the trailing twelve months to June 2023).

So, Covenant Logistics Group has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 13%.

View our latest analysis for Covenant Logistics Group

Above you can see how the current ROCE for Covenant Logistics Group 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 Covenant Logistics Group Tell Us?

There hasn't been much to report for Covenant Logistics Group's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Covenant Logistics Group doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In a nutshell, Covenant Logistics Group has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Covenant Logistics Group, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.