America's Car-Mart (NASDAQ:CRMT) Might Be Having Difficulty Using Its Capital Effectively
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating America's Car-Mart (NASDAQ:CRMT), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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)
0.064 = US$85m ÷ (US$1.4b - US$65m) (Based on the trailing twelve months to January 2023).
Therefore, America's Car-Mart has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 15%.
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'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?
When we looked at the ROCE trend at America's Car-Mart, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.4% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On America's Car-Mart's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that America's Car-Mart is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 48% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you want to know some of the risks facing America's Car-Mart we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.
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.
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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