A look at Landstar System’s impressive returns on capital (NASDAQ: LSTR)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. So when we looked through our eyes Landstar System (NASDAQ: LSTR) ROCE trend, we really liked what we saw.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for the Landstar system:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.40 = $ 394 million ÷ ($ 1.7 billion – $ 720 million) (Based on the last twelve months up to June 2021).
Therefore, Landstar System has a ROCE of 40%. It’s a fantastic return and not only that, it exceeds the 11% average earned by companies in a similar industry.
Check out our latest review for the Landstar system
Above you can see how Landstar System’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can view analyst forecasts covering Landstar System here for free.
What does the ROCE trend of the Landstar system tell us?
As for Landstar System’s ROCE history, it’s pretty impressive. The company has steadily gained 40% over the past five years and the capital employed within the company has increased by 51% during this period. With such high returns, it’s great that the company can continually reinvest their money at such attractive rates of return. If these trends can continue, it wouldn’t surprise us if the company were to become a multi-bagger.
On a separate but related note, it’s important to know that Landstar System has a current liabilities to total assets ratio of 42%, which we consider to be quite high. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.
What we can learn from Landstar System ROCE
Landstar System has demonstrated its competence in generating high returns on increasing amounts of capital employed, which we are delighted with. And long-term investors would be delighted with the 153% return they’ve received over the past five years. So while the stock may be more “expensive” than it was before, we believe that the strong fundamentals justify this stock for further research.
If you would like to continue your research on the Landstar system, you might be interested in knowing the 2 warning signs that our analysis found.
If you want to look for more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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