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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Werner Enterprises' (NASDAQ:WERN) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Werner Enterprises:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$255m ÷ (US$2.6b - US$269m) (Based on the trailing twelve months to December 2021).
Thus, Werner Enterprises has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Transportation industry.
See our latest analysis for Werner Enterprises
In the above chart we have measured Werner Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Werner Enterprises.
The Trend Of ROCE
Werner Enterprises is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. 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 48%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On Werner Enterprises' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Werner Enterprises has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 68% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing: We've identified 3 warning signs with Werner Enterprises (at least 1 which is a bit concerning) , and understanding them would certainly be useful.