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FreightCar America (NASDAQ:RAIL) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in FreightCar America's (NASDAQ:RAIL) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for FreightCar America, this is the formula:

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

0.0073 = US$937k ÷ (US$193m - US$64m) (Based on the trailing twelve months to September 2022).

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Therefore, FreightCar America has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

See our latest analysis for FreightCar America

roce
roce

In the above chart we have measured FreightCar America's 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 FreightCar America here for free.

So How Is FreightCar America's ROCE Trending?

Like most people, we're pleased that FreightCar America is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.7% on their capital employed. Additionally, the business is utilizing 52% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 33% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In the end, FreightCar America has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 80% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One final note, you should learn about the 4 warning signs we've spotted with FreightCar America (including 2 which are a bit unpleasant) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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