To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in America's Car-Mart's (NASDAQ:CRMT) returns on capital, so let's have a look.
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 America's Car-Mart is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$148m ÷ (US$901m - US$62m) (Based on the trailing twelve months to July 2021).
So, America's Car-Mart has an ROCE of 18%. By itself that's a normal return on capital and it's in line with the industry's average returns of 18%.
In the above chart we have measured America's Car-Mart'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 report on analyst forecasts for the company.
What Does the ROCE Trend For America's Car-Mart Tell Us?
Investors would be pleased with what's happening at America's Car-Mart. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 112%. So we're very much inspired by what we're seeing at America's Car-Mart thanks to its ability to profitably reinvest capital.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what America's Car-Mart has. And a remarkable 195% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
America's Car-Mart does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant...
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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