Carr's Group (LON:CARR) Will Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Carr's Group (LON:CARR), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 Carr's Group, this is the formula:

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

0.057 = UK£10m ÷ (UK£265m - UK£83m) (Based on the trailing twelve months to February 2021).

Therefore, Carr's Group has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Food industry average of 8.8%.

View our latest analysis for Carr's Group

Above you can see how the current ROCE for Carr's Group 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 report for Carr's Group.

How Are Returns Trending?

On the surface, the trend of ROCE at Carr's Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.7% from 7.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Carr's Group's ROCE

To conclude, we've found that Carr's Group is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 40% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Carr's Group does have some risks though, and we've spotted 1 warning sign for Carr's Group that you might be interested in.

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. 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.
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