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%.
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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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.
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