Returns On Capital Are A Standout For Eagers Automotive (ASX:APE)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Eagers Automotive's (ASX:APE) look very promising so lets take a look.

Understanding 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. Analysts use this formula to calculate it for Eagers Automotive:

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

0.20 = AU$549m ÷ (AU$5.4b - AU$2.6b) (Based on the trailing twelve months to June 2024).

Therefore, Eagers Automotive has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Specialty Retail industry average of 17% it's pretty much on par.

View our latest analysis for Eagers Automotive

Above you can see how the current ROCE for Eagers Automotive 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 analyst report for Eagers Automotive .

What Can We Tell From Eagers Automotive's ROCE Trend?

The trends we've noticed at Eagers Automotive are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 139% more capital is being employed now too. 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.

On a separate but related note, it's important to know that Eagers Automotive has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Eagers Automotive's ROCE

All in all, it's terrific to see that Eagers Automotive is reaping the rewards from prior investments and is growing its capital base. And with a respectable 51% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

Eagers Automotive does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.