What are the early trends to look for to identify a stock that could multiply in value over the long term? First, we’ll want to see proof to return to on capital employed (ROCE) which is increasing, and on the other hand, a based capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. So during CH Robinson Worldwide (NASDAQ:CHRW) has a high ROCE right now, let’s see what we can decipher from the evolution of returns.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for CH Robinson Worldwide:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.30 = $1.0 billion ÷ ($6.6 billion – $3.3 billion) (Based on the last twelve months to September 2021).
Thereby, CH Robinson Worldwide has a ROCE of 30%. In absolute terms, this is an excellent return and is even better than the logistics industry average of 13%.
Above, you can see how CH Robinson Worldwide’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts are predicting for the future, you should check out our free report for CH Robinson Worldwide.
The ROCE trend
On the surface, the ROCE trend at CH Robinson Worldwide does not inspire confidence. While it is heartening that ROCE is high, five years ago it was 46%. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.
Another thing to note, CH Robinson Worldwide has a high current liabilities to total assets ratio of 49%. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
In conclusion…
Although capital returns have fallen in the short term, we think it is promising that both revenue and capital employed have increased for CH Robinson Worldwide. And the stock has followed suit, returning 52% to shareholders over the past five years. So while the underlying trends can already be explained by investors, we still think this stock deserves further investigation.
One more thing: we have identified 4 warning signs with CH Robinson Worldwide (at least 3 which are a bit of a concern), and understanding them would certainly be helpful.
If you want to see other businesses earning high returns, check out our free list of companies earning high returns with strong balance sheets here.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
