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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of ARB (ASX:ARB) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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 ARB, this is the formula:

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

0.20 = AU$131m ÷ (AU$761m - AU$90m) (Based on the trailing twelve months to December 2023).

So, ARB has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 12%.

Check out our latest analysis for ARB

In the above chart we have measured ARB'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 analyst report for ARB .

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by ARB's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 106% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If ARB can keep this up, we'd be very optimistic about its future.

In Conclusion...

In summary, we're delighted to see that ARB has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 140% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for ARB that compares the share price and estimated value.

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.