There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Knight-Swift Transportation Holdings (NYSE:KNX) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.032 = US$357m ÷ (US$13b - US$1.8b) (Based on the trailing twelve months to December 2023).

Thus, Knight-Swift Transportation Holdings has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 8.3%.

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 to see what analysts are forecasting going forward, you should check out our free report for Knight-Swift Transportation Holdings.

So How Is Knight-Swift Transportation Holdings' ROCE Trending?

In terms of Knight-Swift Transportation Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.3% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Knight-Swift Transportation Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Knight-Swift Transportation Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 86% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Knight-Swift Transportation Holdings, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.