If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Forward Air's (NASDAQ:FWRD) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)
0.25 = US$257m ÷ (US$1.2b - US$180m) (Based on the trailing twelve months to September 2022).
Therefore, Forward Air has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Logistics industry average of 14%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Forward Air's ROCE Trending?
Investors would be pleased with what's happening at Forward Air. Over the last five years, returns on capital employed have risen substantially to 25%. 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 65%. So we're very much inspired by what we're seeing at Forward Air thanks to its ability to profitably reinvest capital.
The Bottom Line On Forward Air's ROCE
To sum it up, Forward Air has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 105% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Forward Air can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Forward Air, we've discovered 1 warning sign that you should be aware of.
Forward Air 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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