If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think RXO (NYSE:RXO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for RXO:

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

0.059 = US$67m ÷ (US$1.8b - US$682m) (Based on the trailing twelve months to December 2023).

Thus, RXO has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 8.1%.

View our latest analysis for RXO

In the above chart we have measured RXO's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for RXO .

What Can We Tell From RXO's ROCE Trend?

Things have been pretty stable at RXO, with its capital employed and returns on that capital staying somewhat the same for the last three years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if RXO doesn't end up being a multi-bagger in a few years time.

The Bottom Line On RXO's ROCE

In summary, RXO isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 12% over the last year, 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.

One more thing: We've identified 3 warning signs with RXO (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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.