Investors Should Be Encouraged By Cavco Industries' (NASDAQ:CVCO) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Cavco Industries' (NASDAQ:CVCO) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Cavco Industries is:

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

0.21 = US$228m ÷ (US$1.4b - US$305m) (Based on the trailing twelve months to September 2023).

So, Cavco Industries has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.

Check out our latest analysis for Cavco Industries

Above you can see how the current ROCE for Cavco Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cavco Industries.

So How Is Cavco Industries' ROCE Trending?

Cavco Industries is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 105%. So we're very much inspired by what we're seeing at Cavco Industries thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, Cavco Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 70% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Cavco Industries can keep these trends up, it could have a bright future ahead.

While Cavco Industries looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CVCO is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.