Matson (NYSE:MATX) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Matson (NYSE:MATX) we really liked what we saw.

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 Matson is:

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

0.25 = US$922m ÷ (US$4.2b - US$536m) (Based on the trailing twelve months to March 2023).

So, Matson has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Shipping industry average of 14%.

See our latest analysis for Matson

Above you can see how the current ROCE for Matson compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Matson here for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Matson are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 25%. 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 83%. So we're very much inspired by what we're seeing at Matson thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Matson 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. And a remarkable 116% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Matson can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Matson (of which 1 is a bit concerning!) that you should know about.

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.