- Oops!Something went wrong.Please try again later.
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Forward Air (NASDAQ:FWRD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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 Forward Air is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$94m ÷ (US$1.1b - US$147m) (Based on the trailing twelve months to June 2020).
Therefore, Forward Air has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Logistics industry.
In the above chart we have measured Forward Air'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 Forward Air here for free.
What Can We Tell From Forward Air's ROCE Trend?
On the surface, the trend of ROCE at Forward Air doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 17% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Forward Air is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 37% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a separate note, we've found 2 warning signs for Forward Air you'll probably want to know about.
While Forward Air 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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.