May 25, 2022

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C.H. Robinson Worldwide (NASDAQ:CHRW) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 C.H. Robinson Worldwide (NASDAQ:CHRW), they do have a high ROCE, but we weren’t exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for C.H. Robinson Worldwide:

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

0.24 = US$787m ÷ (US$5.6b – US$2.3b) (Based on the trailing twelve months to March 2021).

Therefore, C.H. Robinson Worldwide has an ROCE of 24%. That’s a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

roceNasdaqGS:CHRW Return on Capital Employed June 24th 2021

Above you can see how the current ROCE for C.H. Robinson Worldwide 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 C.H. Robinson Worldwide here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at C.H. Robinson Worldwide doesn’t inspire confidence. Historically returns on capital were even higher at 49%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it’s important to know that C.H. Robinson Worldwide has a current liabilities to total assets ratio of 41%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, despite lower returns in the short term, we’re encouraged to see that C.H. Robinson Worldwide is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 43% to shareholders over the last five years. So should these growth trends continue, we’d be optimistic on the stock going forward.

One more thing, we’ve spotted 2 warning signs facing C.H. Robinson Worldwide that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

This article by Simply Wall St is general in nature. 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.

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