If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at C.H. Robinson Worldwide (NASDAQ:CHRW) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
What is 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. To calculate this metric for C.H. Robinson Worldwide, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = US$603m ÷ (US$5.1b – US$1.8b) (Based on the trailing twelve months to September 2020).
Therefore, C.H. Robinson Worldwide has an ROCE of 18%. On its own, that’s a standard return, however it’s much better than the 10% generated by the Logistics industry.
View our latest analysis for C.H. Robinson Worldwide
In the above chart we have measured C.H. Robinson Worldwide’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 report for C.H. Robinson Worldwide.
What The Trend Of ROCE Can Tell Us
In terms of C.H. Robinson Worldwide’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 18% from 48% five years ago. However it looks like C.H. Robinson Worldwide might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, C.H. Robinson Worldwide has done well to pay down its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On C.H. Robinson Worldwide’s ROCE
To conclude, we’ve found that C.H. Robinson Worldwide is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
On a separate note, we’ve found 2 warning signs for C.H. Robinson Worldwide you’ll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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