If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Matson's (NYSE:MATX) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Matson is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.48 = US$1.7b ÷ (US$4.2b - US$632m) (Based on the trailing twelve months to June 2022).
Thus, Matson has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Above you can see how the current ROCE for Matson compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Matson here for free.
So How Is Matson's ROCE Trending?
Matson is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 48%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 100%. So we're very much inspired by what we're seeing at Matson thanks to its ability to profitably reinvest capital.
All in all, it's terrific to see that Matson is reaping the rewards from prior investments and is growing its capital base. And a remarkable 209% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Matson can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Matson, we've spotted 3 warning signs, and 1 of them is a bit concerning.
Matson is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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