If we want to find a stock that can reproduce itself in the long term, what are the fundamentals we should look for? Normally, we’ll want to take care of the growing process come back on capital employed (ROCE) and besides, growing the foundation of money spent. Simply put, these types of businesses are compounding machines, which means they always invest their earnings at very high rates. However, after doing some research America’s Car-Mart (NASDAQ: CRMT ), we don’t think current trends fit the multi-batch mold.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you’re not sure, ROCE is a metric that measures how much pre-tax income (in percentage) a company earns on the money invested in its business. Appraisers use this formula to calculate America’s Car-Mart:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.082 = US$101m ÷ (US$1.3b – US$66m) (Based on the next twelve months to October 2022).
As a result, America’s Car-Mart has a ROCE of 8.2%. In other words, that’s a low margin and also underperforms the Specialty Retail industry average of 18%.
Check out our latest review of America’s Car-Mart
In the chart above we’ve measured America’s Car-Mart’s ROCE against its past performance, but the future is more important. If you’d like, you can check out the predictions from analysts talking about America’s Car-Mart here for for free.
The ROCE Method
There are better cash returns than what we see at America’s Car-Mart. The company has been earning 8.2% over the past five years, and operating income has risen 201% during that time. Due to the fact that the company has increased the amount of capital used, it seems that the investments made do not provide a high return on capital.
What We Can Learn from America’s Car-Mart ROCE
Finally, America’s Car-Mart is investing heavily in the business, but the returns on that investment are not increasing. Since the stock has gained an impressive 52% over the past five years, investors have to assume that there are better things to come. But if the performance of these main trends continues, we think that the possibility of them being more baggers from here is not great.
One last point, you should learn about it 3 warning signs we also saw America’s Car-Mart (including 2 rather unpleasant ones) .
While America’s Car-Mart may not have the highest earnings, we’ve compiled a list of companies that currently earn more than 25% in profits. Look at this for free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst estimates using an unbiased approach and our articles are not intended as financial advice. It does not make an offer to buy or sell any property, and does not consider your motives, or your financial situation. We are committed to bringing you long-term analysis focused on fundamentals. Note that our review may not include recent company announcements that are not sensitive to pricing or quality equipment. Simply Wall St has no position in the stocks mentioned.