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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Expeditors International of Washington (NASDAQ:EXPD), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Expeditors International of Washington is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$940m ÷ (US$4.9b - US$1.9b) (Based on the trailing twelve months to December 2020).
Therefore, Expeditors International of Washington has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Logistics industry average of 9.1%.
In the above chart we have measured Expeditors International of Washington's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Expeditors International of Washington Tell Us?
In terms of Expeditors International of Washington's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 42%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Expeditors International of Washington's ROCE
While returns have fallen for Expeditors International of Washington 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 127% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a final note, we've found 1 warning sign for Expeditors International of Washington that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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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