Investors Will Want Carriage Services' (NYSE:CSV) Growth In ROCE To Persist
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Carriage Services (NYSE:CSV) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Carriage Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = US$94m ÷ (US$1.2b - US$61m) (Based on the trailing twelve months to September 2021).
Thus, Carriage Services has an ROCE of 8.5%. On its own, that's a low figure but it's around the 7.4% average generated by the Consumer Services industry.
See our latest analysis for Carriage Services
In the above chart we have measured Carriage Services' 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 Carriage Services here for free.
What Can We Tell From Carriage Services' ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.5%. The amount of capital employed has increased too, by 34%. So we're very much inspired by what we're seeing at Carriage Services thanks to its ability to profitably reinvest capital.
What We Can Learn From Carriage Services' ROCE
All in all, it's terrific to see that Carriage Services is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 125% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Carriage Services does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While Carriage Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
