Investors Will Want GXO Logistics' (NYSE:GXO) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in GXO Logistics' (NYSE:GXO) returns on capital, so let's have 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. The formula for this calculation on GXO Logistics is:

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

0.057 = US$392m ÷ (US$9.5b - US$2.6b) (Based on the trailing twelve months to December 2023).

Therefore, GXO Logistics has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 9.3%.

Check out our latest analysis for GXO Logistics

Above you can see how the current ROCE for GXO Logistics 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 analyst report for GXO Logistics .

So How Is GXO Logistics' ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last four years to 5.7%. The amount of capital employed has increased too, by 47%. So we're very much inspired by what we're seeing at GXO Logistics thanks to its ability to profitably reinvest capital.

What We Can Learn From GXO Logistics' ROCE

All in all, it's terrific to see that GXO Logistics is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 6.1% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

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 GXO that compares the share price and estimated value.

While GXO Logistics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.