Many Would Be Envious Of Old Dominion Freight Line's (NASDAQ:ODFL) Excellent Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Old Dominion Freight Line's (NASDAQ:ODFL) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Old Dominion Freight Line, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$993m ÷ (US$4.4b - US$514m) (Based on the trailing twelve months to March 2021).
Thus, Old Dominion Freight Line has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.
Check out our latest analysis for Old Dominion Freight Line
In the above chart we have measured Old Dominion Freight Line's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Old Dominion Freight Line here for free.
How Are Returns Trending?
We'd be pretty happy with returns on capital like Old Dominion Freight Line. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 26%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Old Dominion Freight Line can keep this up, we'd be very optimistic about its future.
The Key Takeaway
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 510% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
While Old Dominion Freight Line looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ODFL is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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