If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Cavco Industries' (NASDAQ:CVCO) look very promising so lets take a look.
What Is 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)
0.28 = US$247m ÷ (US$1.2b - US$305m) (Based on the trailing twelve months to July 2022).
Thus, Cavco Industries has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 17%.
In the above chart we have measured Cavco Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cavco Industries.
How Are Returns Trending?
Investors would be pleased with what's happening at Cavco Industries. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 28%. The amount of capital employed has increased too, by 88%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Cavco Industries' ROCE
All in all, it's terrific to see that Cavco Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 66% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
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.
Cavco Industries is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
What are the risks and opportunities for Cavco Industries?
Trading at 60.8% below our estimate of its fair value
Earnings grew by 144% over the past year
Earnings are forecast to decline by an average of 14.8% per year for the next 3 years
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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.
Cavco Industries, Inc. designs, produces, and retails manufactured homes primarily in the United States.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with outstanding track record.