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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Landstar System (NASDAQ:LSTR), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Landstar System is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$281m ÷ (US$1.8b - US$606m) (Based on the trailing twelve months to June 2024).
So, Landstar System has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Transportation industry average of 9.1%.
Check out our latest analysis for Landstar System
Above you can see how the current ROCE for Landstar System 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 Landstar System for free.
What The Trend Of ROCE Can Tell Us
In terms of Landstar System's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 38%, but they have dropped over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On Landstar System's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Landstar System have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 87% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Landstar System could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for LSTR on our platform quite valuable.