What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Knight-Swift Transportation Holdings (NYSE:KNX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Knight-Swift Transportation Holdings is:

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

0.012 = US$139m ÷ (US$13b - US$1.4b) (Based on the trailing twelve months to September 2024).

Therefore, Knight-Swift Transportation Holdings has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Transportation industry average of 6.6%.

In the above chart we have measured Knight-Swift Transportation Holdings' 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 Knight-Swift Transportation Holdings for free.

How Are Returns Trending?

When we looked at the ROCE trend at Knight-Swift Transportation Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.8% over the last five years. However it looks like Knight-Swift Transportation Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Knight-Swift Transportation Holdings' ROCE

To conclude, we've found that Knight-Swift Transportation Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 3 warning signs with Knight-Swift Transportation Holdings and understanding them should be part of your investment process.

While Knight-Swift Transportation Holdings isn't earning the highest return, check out this free list of companies that are 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.