Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Mainfreight's (NZSE:MFT) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Mainfreight, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = NZ$969m ÷ (NZ$3.4b - NZ$866m) (Based on the trailing twelve months to March 2023).
Therefore, Mainfreight has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
Above you can see how the current ROCE for Mainfreight compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Investors would be pleased with what's happening at Mainfreight. Over the last five years, returns on capital employed have risen substantially to 38%. 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 155%. So we're very much inspired by what we're seeing at Mainfreight thanks to its ability to profitably reinvest capital.
Our Take On Mainfreight's ROCE
In summary, it's great to see that Mainfreight 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 135% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
While Mainfreight looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MFT is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.