Return Trends At American Woodmark (NASDAQ:AMWD) Aren't Appealing
There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at American Woodmark (NASDAQ:AMWD) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for American Woodmark, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$160m ÷ (US$1.5b - US$181m) (Based on the trailing twelve months to October 2023).
So, American Woodmark has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Building industry average it falls behind.
View our latest analysis for American Woodmark
In the above chart we have measured American Woodmark's 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 American Woodmark here for free.
So How Is American Woodmark's ROCE Trending?
Over the past five years, American Woodmark's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at American Woodmark in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
In Conclusion...
We can conclude that in regards to American Woodmark's returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we've found 1 warning sign for American Woodmark that we think you should be aware of.
While American Woodmark 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.
