Here's What Expeditors International of Washington's (NASDAQ:EXPD) Strong Returns On Capital Mean

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. That's why when we briefly looked at Expeditors International of Washington's (NASDAQ:EXPD) ROCE trend, we were very happy with what we saw.

Understanding 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. The formula for this calculation on Expeditors International of Washington is:

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

0.36 = US$1.2b ÷ (US$5.5b - US$2.2b) (Based on the trailing twelve months to March 2021).

So, Expeditors International of Washington has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Expeditors International of Washington

In the above chart we have measured Expeditors International of Washington'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 Expeditors International of Washington.

How Are Returns Trending?

In terms of Expeditors International of Washington's history of ROCE, it's quite impressive. The company has consistently earned 36% for the last five years, and the capital employed within the business has risen 79% in that time. Now considering ROCE is an attractive 36%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Expeditors International of Washington can keep this up, we'd be very optimistic about its future.

Another thing to note, Expeditors International of Washington has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Expeditors International of Washington's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 170% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Expeditors International of Washington does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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