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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Ryder System (NYSE:R) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Ryder System is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$323m ÷ (US$14b - US$2.5b) (Based on the trailing twelve months to September 2020).
Thus, Ryder System has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.8%.
In the above chart we have measured Ryder System'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 Ryder System.
What Can We Tell From Ryder System's ROCE Trend?
There is reason to be cautious about Ryder System, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.7% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ryder System becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Ryder System is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 38% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to know some of the risks facing Ryder System we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.
While Ryder System isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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