Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Landstar System's (NASDAQ:LSTR) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Landstar System is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.49 = US$504m ÷ (US$2.0b - US$1.0b) (Based on the trailing twelve months to December 2021).
So, Landstar System has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Transportation industry average of 12%.
Above you can see how the current ROCE for Landstar System compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Landstar System here for free.
What Can We Tell From Landstar System's ROCE Trend?
We like the trends that we're seeing from Landstar System. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 49%. The amount of capital employed has increased too, by 45%. So we're very much inspired by what we're seeing at Landstar System thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Landstar System has. And with a respectable 88% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Landstar System does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...
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.