Returns On Capital At American Woodmark (NASDAQ:AMWD) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 American Woodmark (NASDAQ:AMWD), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on American Woodmark is:

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

0.084 = US$117m ÷ (US$1.6b - US$168m) (Based on the trailing twelve months to January 2023).

Therefore, American Woodmark has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Building industry average of 14%.

Check out 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, you can check out the forecasts from the analysts covering American Woodmark here for free.

SWOT Analysis for American Woodmark

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for American Woodmark's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if American Woodmark doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In summary, American Woodmark isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think American Woodmark has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with American Woodmark and understanding it should be part of your investment process.

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.