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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Avis Budget Group (NASDAQ:CAR) looks quite promising in regards to its trends of return on capital.
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 Avis Budget Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$2.4b ÷ (US$23b - US$2.5b) (Based on the trailing twelve months to December 2021).
Therefore, Avis Budget Group has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
In the above chart we have measured Avis Budget Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Avis Budget Group.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Avis Budget Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 26%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
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 Avis Budget Group has. Since the stock has returned a staggering 484% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One final note, you should learn about the 5 warning signs we've spotted with Avis Budget Group (including 2 which are potentially serious) .
While Avis Budget Group 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.
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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.