AUTO1 Group's (ETR:AG1) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at AUTO1 Group (ETR:AG1) so let's look a bit deeper.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AUTO1 Group, this is the formula:

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

0.0021 = €3.3m ÷ (€2.0b - €430m) (Based on the trailing twelve months to September 2024).

Thus, AUTO1 Group has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.2%.

Check out our latest analysis for AUTO1 Group

In the above chart we have measured AUTO1 Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AUTO1 Group .

How Are Returns Trending?

The fact that AUTO1 Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.2% on its capital. And unsurprisingly, like most companies trying to break into the black, AUTO1 Group is utilizing 258% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

In summary, it's great to see that AUTO1 Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 134% to shareholders over the last three years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing AUTO1 Group that you might find interesting.

While AUTO1 Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.