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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think J.B. Hunt Transport Services (NASDAQ:JBHT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for J.B. Hunt Transport Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$832m ÷ (US$6.3b - US$1.2b) (Based on the trailing twelve months to June 2021).
So, J.B. Hunt Transport Services has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Transportation industry.
Above you can see how the current ROCE for J.B. Hunt Transport Services 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 J.B. Hunt Transport Services here for free.
So How Is J.B. Hunt Transport Services' ROCE Trending?
On the surface, the trend of ROCE at J.B. Hunt Transport Services doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 16%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
While returns have fallen for J.B. Hunt Transport Services in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 136% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Like most companies, J.B. Hunt Transport Services does come with some risks, and we've found 2 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.
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.
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