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Should Knight-Swift Transportation Holdings Inc.’s (NYSE:KNX) Weak Investment Returns Worry You?

Simply Wall St

Today we are going to look at Knight-Swift Transportation Holdings Inc. (NYSE:KNX) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

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 Knight-Swift Transportation Holdings:

0.068 = US$519m ÷ (US$8.3b - US$697m) (Based on the trailing twelve months to September 2019.)

So, Knight-Swift Transportation Holdings has an ROCE of 6.8%.

See our latest analysis for Knight-Swift Transportation Holdings

Does Knight-Swift Transportation Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Knight-Swift Transportation Holdings's ROCE appears meaningfully below the 11% average reported by the Transportation industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Knight-Swift Transportation Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Knight-Swift Transportation Holdings's current ROCE of 6.8% is lower than its ROCE in the past, which was 15%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Knight-Swift Transportation Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:KNX Past Revenue and Net Income, January 9th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Knight-Swift Transportation Holdings's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Knight-Swift Transportation Holdings has total liabilities of US$697m and total assets of US$8.3b. Therefore its current liabilities are equivalent to approximately 8.4% of its total assets. With low levels of current liabilities, at least Knight-Swift Transportation Holdings's mediocre ROCE is not unduly boosted.

Our Take On Knight-Swift Transportation Holdings's ROCE

Knight-Swift Transportation Holdings looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.