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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Old Dominion Freight Line (NASDAQ:ODFL) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.32 = US$1.6b ÷ (US$5.7b - US$551m) (Based on the trailing twelve months to March 2024).

Therefore, Old Dominion Freight Line has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Transportation industry average of 7.1%.

Check out our latest analysis for Old Dominion Freight Line

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Old Dominion Freight Line .

What The Trend Of ROCE Can Tell Us

Old Dominion Freight Line is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 32%. The amount of capital employed has increased too, by 52%. 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.

The Bottom Line On Old Dominion Freight Line's ROCE

In summary, it's great to see that Old Dominion Freight Line can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 267% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for ODFL that compares the share price and estimated value.

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.