Art's-Way Manufacturing's (NASDAQ:ARTW) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Art's-Way Manufacturing (NASDAQ:ARTW) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Art's-Way Manufacturing, this is the formula:

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

0.002 = US$29k ÷ (US$23m - US$9.1m) (Based on the trailing twelve months to August 2024).

Therefore, Art's-Way Manufacturing has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

Check out our latest analysis for Art's-Way Manufacturing

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Art's-Way Manufacturing's past further, check out this free graph covering Art's-Way Manufacturing's past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Art's-Way Manufacturing is reaping rewards from its investments and has now broken into profitability. The company now earns 0.2% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

What We Can Learn From Art's-Way Manufacturing's ROCE

To bring it all together, Art's-Way Manufacturing has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 23% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 2 warning signs for Art's-Way Manufacturing that we think you should be aware of.

While Art's-Way Manufacturing 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.