CarGurus (NASDAQ:CARG) Shareholders Will Want The ROCE Trajectory To Continue
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, CarGurus (NASDAQ:CARG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 CarGurus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$119m ÷ (US$719m - US$82m) (Based on the trailing twelve months to March 2021).
Therefore, CarGurus has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Interactive Media and Services industry average of 10% it's much better.
See our latest analysis for CarGurus
Above you can see how the current ROCE for CarGurus compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From CarGurus' ROCE Trend?
Investors would be pleased with what's happening at CarGurus. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 898%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
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 CarGurus has. And since the stock has fallen 28% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, CarGurus does come with some risks, and we've found 2 warning signs that you should be aware of.
While CarGurus 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.
This article by Simply Wall St is general in nature. 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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