Stock Analysis

Investors Should Be Encouraged By Old Dominion Freight Line's (NASDAQ:ODFL) Returns On Capital

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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Old Dominion Freight Line's (NASDAQ:ODFL) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Old Dominion Freight Line, this is the formula:

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

0.31 = US$1.3b ÷ (US$4.6b - US$534m) (Based on the trailing twelve months to September 2021).

Therefore, Old Dominion Freight Line has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Transportation industry average of 12%.

View our latest analysis for Old Dominion Freight Line

NasdaqGS:ODFL Return on Capital Employed November 1st 2021

Above you can see how the current ROCE for Old Dominion Freight Line 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 Old Dominion Freight Line here for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Old Dominion Freight Line are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 31%. 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 69%. So we're very much inspired by what we're seeing at Old Dominion Freight Line thanks to its ability to profitably reinvest capital.

What We Can Learn From Old Dominion Freight Line's ROCE

To sum it up, Old Dominion Freight Line has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 614% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Old Dominion Freight Line can keep these trends up, it could have a bright future ahead.

Like most companies, Old Dominion Freight Line does come with some risks, and we've found 1 warning sign that you should be aware of.

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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Find out whether Old Dominion Freight Line is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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