Here's What's Concerning About RXO's (NYSE:RXO) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into RXO (NYSE:RXO), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for RXO:

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

0.043 = US$48m ÷ (US$1.8b - US$674m) (Based on the trailing twelve months to March 2024).

So, RXO has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 7.1%.

See our latest analysis for RXO

In the above chart we have measured RXO'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 RXO .

What Can We Tell From RXO's ROCE Trend?

There is reason to be cautious about RXO, given the returns are trending downwards. To be more specific, the ROCE was 9.0% three years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last three years. If these trends continue, we wouldn't expect RXO to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that RXO is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

RXO does have some risks though, and we've spotted 1 warning sign for RXO that you might be interested in.

While RXO 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.