Investors Shouldn't Overlook The Favourable Returns On Capital At Cintas (NASDAQ:CTAS)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Cintas' (NASDAQ:CTAS) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cintas is:

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

0.28 = US$1.5b ÷ (US$8.2b - US$2.6b) (Based on the trailing twelve months to February 2022).

So, Cintas has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

Check out our latest analysis for Cintas

Above you can see how the current ROCE for Cintas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cintas here for free.

So How Is Cintas' ROCE Trending?

We'd be pretty happy with returns on capital like Cintas. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 65% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 32% of total assets, this reported ROCE would probably be less than28% because total capital employed would be higher.The 28% ROCE could be even lower if current liabilities weren't 32% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 184% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Cintas does have some risks though, and we've spotted 3 warning signs for Cintas that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.