Shareholders Are Optimistic That ARB (ASX:ARB) Will Multiply In Value

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at ARB (ASX:ARB), we liked what we saw.

What Is 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. To calculate this metric for ARB, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.23 = AU$140m ÷ (AU$711m - AU$90m) (Based on the trailing twelve months to December 2022).

Therefore, ARB has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.6% earned by companies in a similar industry.

View our latest analysis for ARB

Above you can see how the current ROCE for ARB 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.

SWOT Analysis for ARB

The Trend Of ROCE

In terms of ARB's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 118% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Key Takeaway

In short, we'd argue ARB has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last five years, the stock has only delivered a 34% return to shareholders who held over that period. So to determine if ARB is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While ARB looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ARB is currently trading for a fair price.

ARB is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.