Sonic Automotive (NYSE:SAH) Is Experiencing Growth In Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Sonic Automotive (NYSE:SAH) 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. To calculate this metric for Sonic Automotive, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$608m ÷ (US$5.0b - US$1.9b) (Based on the trailing twelve months to March 2022).
Therefore, Sonic Automotive has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 18%.
Check out our latest analysis for Sonic Automotive
In the above chart we have measured Sonic Automotive'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.
How Are Returns Trending?
We like the trends that we're seeing from Sonic Automotive. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 78%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 37%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Sonic Automotive's ROCE
To sum it up, Sonic Automotive has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 104% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a separate note, we've found 2 warning signs for Sonic Automotive you'll probably want to know about.
While Sonic Automotive 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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