American Woodmark's (NASDAQ:AMWD) Returns Have Hit A Wall

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at American Woodmark (NASDAQ:AMWD), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for American Woodmark:

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

0.12 = US$157m ÷ (US$1.5b - US$176m) (Based on the trailing twelve months to July 2023).

Therefore, American Woodmark has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Building industry average it falls behind.

View our latest analysis for American Woodmark

In the above chart we have measured American Woodmark'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 report for American Woodmark.

What Can We Tell From American Woodmark's ROCE Trend?

Things have been pretty stable at American Woodmark, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if American Woodmark doesn't end up being a multi-bagger in a few years time.

The Bottom Line On American Woodmark's ROCE

We can conclude that in regards to American Woodmark's returns on capital employed and the trends, there isn't much change to report on. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think American Woodmark has the makings of a multi-bagger.

American Woodmark could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While American Woodmark may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.