Slowing Rates Of Return At ARB (ASX:ARB) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 decent, right now, so lets see what the trend of returns can tell us.

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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. The formula for this calculation on ARB is:

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

0.18 = AU$144m ÷ (AU$881m - AU$101m) (Based on the trailing twelve months to December 2024).

So, ARB has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 11% it's much better.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ARB .

What Does the ROCE Trend For ARB Tell Us?

While the returns on capital are good, they haven't moved much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 94% in that time. 18% is a pretty standard return, and it provides some comfort knowing that ARB has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

In the end, ARB has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 93% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While ARB doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for ARB on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.