Why The 43% Return On Capital At Old Dominion Freight Line (NASDAQ:ODFL) Should Have Your Attention

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Old Dominion Freight Line (NASDAQ:ODFL) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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)

0.43 = US$1.8b ÷ (US$4.8b - US$639m) (Based on the trailing twelve months to September 2022).

Therefore, Old Dominion Freight Line has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Transportation industry average of 15%.

Our analysis indicates that ODFL is potentially overvalued!

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

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Old Dominion Freight Line. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 43%. The amount of capital employed has increased too, by 60%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From 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 245% 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.

On a final note, we've found 1 warning sign for Old Dominion Freight Line that we think you should be aware of.

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.