If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 investigating America’s Car-Mart (NASDAQ:CRMT), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 America’s Car-Mart:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.082 = US$101m ÷ (US$1.3b – US$66m) (Based on the trailing twelve months to October 2022).
So, America’s Car-Mart has an ROCE of 8.2%. In absolute terms, that’s a low return and it also under-performs the Specialty Retail industry average of 18%.
See our latest analysis for America’s Car-Mart
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’d like, you can check out the forecasts from the analysts covering America’s Car-Mart here for free
The Trend Of ROCE
There are better returns on capital out there than what we’re seeing at America’s Car-Mart. The company has consistently earned 8.2% for the last five years, and the capital employed within the business has risen 201% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply do not provide a high return on capital.
What We Can Learn From America’s Car-Mart’s ROCE
In conclusion, America’s Car-Mart has been investing more capital into the business, but returns on that capital haven’t increased. Since the stock has gained an impressive 52% 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.
One final note, you should learn about the 3 warning signs We’ve spotted with America’s Car-Mart (including 2 which are a bit unpleasant).
While America’s Car-Mart may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we’re helping make it simple.
Find out whether America’s Car-Mart is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.