Covenant Logistics Group (NASDAQ:CVLG) Is Finding It Tricky To Allocate Its Capital
What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Covenant Logistics Group (NASDAQ:CVLG) we aren't filled with optimism, but let's investigate further.
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 Covenant Logistics Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0089 = US$4.8m ÷ (US$677m - US$133m) (Based on the trailing twelve months to December 2020).
Therefore, Covenant Logistics Group has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 10%.
See our latest analysis for Covenant Logistics Group
In the above chart we have measured Covenant Logistics Group'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 Covenant Logistics Group.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Covenant Logistics Group, given the returns are trending downwards. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Covenant Logistics Group to turn into a multi-bagger.
The Bottom Line On Covenant Logistics Group's ROCE
In summary, it's unfortunate that Covenant Logistics Group is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Covenant Logistics Group does have some risks though, and we've spotted 1 warning sign for Covenant Logistics Group that you might be interested in.
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.
This article by Simply Wall St is general in nature. 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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