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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Cargojet (TSE:CJT) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Cargojet, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$151m ÷ (CA$1.4b - CA$109m) (Based on the trailing twelve months to June 2021).
Thus, Cargojet has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Logistics industry average of 12%.
In the above chart we have measured Cargojet'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 Cargojet here for free.
The Trend Of ROCE
We like the trends that we're seeing from Cargojet. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 223%. So we're very much inspired by what we're seeing at Cargojet thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that Cargojet can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 464% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Cargojet does have some risks though, and we've spotted 3 warning signs for Cargojet that you might be interested in.
While Cargojet may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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