We Like These Underlying Return On Capital Trends At GXO Logistics (NYSE:GXO)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at GXO Logistics (NYSE:GXO) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for GXO Logistics, this is the formula:

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

0.055 = US$368m ÷ (US$9.1b - US$2.4b) (Based on the trailing twelve months to March 2023).

So, GXO Logistics has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 14%.

Check out our latest analysis for GXO Logistics

In the above chart we have measured GXO Logistics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering GXO Logistics here for free.

So How Is GXO Logistics' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last three years to 5.5%. 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 42%. 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 GXO Logistics' 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 GXO Logistics has. Since the stock has returned a solid 33% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing GXO Logistics, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.