Returns At Art's-Way Manufacturing (NASDAQ:ARTW) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Art's-Way Manufacturing (NASDAQ:ARTW) so let's look a bit deeper.

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 Art's-Way Manufacturing is:

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

0.023 = US$333k ÷ (US$24m - US$9.3m) (Based on the trailing twelve months to November 2022).

Therefore, Art's-Way Manufacturing has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

View our latest analysis for Art's-Way Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Art's-Way Manufacturing's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Art's-Way Manufacturing, check out these free graphs here.

The Trend Of ROCE

Like most people, we're pleased that Art's-Way Manufacturing is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.3% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 24%. Art's-Way Manufacturing could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

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

From what we've seen above, Art's-Way Manufacturing has managed to increase it's returns on capital all the while reducing it's capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 4 warning signs for Art's-Way Manufacturing (1 is potentially serious) 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.