Old Dominion Freight Line (NASDAQ:ODFL) Is Very Good At Capital Allocation

By
Simply Wall St
Published
August 01, 2021
NasdaqGS:ODFL
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Old Dominion Freight Line's (NASDAQ:ODFL) 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 Old Dominion Freight Line is:

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

0.29 = US$1.2b ÷ (US$4.5b - US$482m) (Based on the trailing twelve months to June 2021).

Therefore, Old Dominion Freight Line has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for Old Dominion Freight Line

roce
NasdaqGS:ODFL Return on Capital Employed August 1st 2021

In the above chart we have measured Old Dominion Freight Line's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Investors would be pleased with what's happening at Old Dominion Freight Line. The data shows that returns on capital have increased substantially over the last five years to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 71% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Old Dominion Freight Line's ROCE

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 Old Dominion Freight Line has. Since the stock has returned a staggering 481% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Old Dominion Freight Line looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ODFL is currently trading for a fair price.

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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