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When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into C.H. Robinson Worldwide (NASDAQ:CHRW), we weren't too upbeat about how things were going.
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 C.H. Robinson Worldwide is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$625m ÷ (US$5.6b - US$2.2b) (Based on the trailing twelve months to September 2024).
Thus, C.H. Robinson Worldwide has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 13% it's much better.
Check out our latest analysis for C.H. Robinson Worldwide
In the above chart we have measured C.H. Robinson Worldwide's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering C.H. Robinson Worldwide for free.
How Are Returns Trending?
There is reason to be cautious about C.H. Robinson Worldwide, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 28% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect C.H. Robinson Worldwide to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that C.H. Robinson Worldwide is generating lower returns from the same amount of capital. However the stock has delivered a 58% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing: We've identified 2 warning signs with C.H. Robinson Worldwide (at least 1 which is concerning) , and understanding these would certainly be useful.