Investors Will Want Cavco Industries' (NASDAQ:CVCO) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Cavco Industries (NASDAQ:CVCO) and its trend of ROCE, we really liked 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 Cavco Industries is:

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

0.17 = US$130m ÷ (US$1.1b - US$282m) (Based on the trailing twelve months to October 2021).

Therefore, Cavco Industries has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 15%.

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?

We like the trends that we're seeing from Cavco Industries. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 75% more capital is being employed now too. So we're very much inspired by what we're seeing at Cavco Industries thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Cavco Industries has. And a remarkable 201% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Cavco Industries does have some risks though, and we've spotted 2 warning signs for Cavco Industries that you might be interested in.

While Cavco Industries 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.