We Like These Underlying Return On Capital Trends At AUTO1 Group (ETR:AG1)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in AUTO1 Group's (ETR:AG1) returns on capital, so let's have a look.

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

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 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).

So, AUTO1 Group has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 11%.

See our latest analysis for AUTO1 Group

Above you can see how the current ROCE for AUTO1 Group 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 AUTO1 Group .

What The Trend Of ROCE Can Tell Us

We're delighted to see that AUTO1 Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 0.2% which is a sight for sore eyes. Not only that, but the company is utilizing 258% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From AUTO1 Group's ROCE

In summary, it's great to see that AUTO1 Group has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 17% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching AUTO1 Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.