Investors Could Be Concerned With Knight-Swift Transportation Holdings' (NYSE:KNX) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Knight-Swift Transportation Holdings (NYSE:KNX) 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?

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. The formula for this calculation on Knight-Swift Transportation Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.017 = US$183m ÷ (US$13b - US$1.6b) (Based on the trailing twelve months to March 2024).

So, Knight-Swift Transportation Holdings has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 8.2%.

View our latest analysis for Knight-Swift Transportation Holdings

roce

Above you can see how the current ROCE for Knight-Swift Transportation Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Knight-Swift Transportation Holdings for free.

So How Is Knight-Swift Transportation Holdings' ROCE Trending?

In terms of Knight-Swift Transportation Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.7% from 7.6% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Knight-Swift Transportation Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Knight-Swift Transportation Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 64% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Knight-Swift Transportation Holdings does have some risks though, and we've spotted 2 warning signs for Knight-Swift Transportation Holdings that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.