Today we are going to look at Old Dominion Freight Line, Inc. (NASDAQ:ODFL) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Old Dominion Freight Line:
0.26 = US$860m ÷ (US$3.8b - US$386m) (Based on the trailing twelve months to June 2019.)
Therefore, Old Dominion Freight Line has an ROCE of 26%.
Does Old Dominion Freight Line Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Old Dominion Freight Line's ROCE appears to be substantially greater than the 11% average in the Transportation industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Old Dominion Freight Line's ROCE in absolute terms currently looks quite high.
You can see in the image below how Old Dominion Freight Line's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Old Dominion Freight Line's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Old Dominion Freight Line has total liabilities of US$386m and total assets of US$3.8b. Therefore its current liabilities are equivalent to approximately 10% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
What We Can Learn From Old Dominion Freight Line's ROCE
Low current liabilities and high ROCE is a good combination, making Old Dominion Freight Line look quite interesting. There might be better investments than Old Dominion Freight Line out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Old Dominion Freight Line better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.