CorVel (NASDAQ:CRVL) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of CorVel (NASDAQ:CRVL) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CorVel:

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

0.40 = US$88m ÷ (US$408m - US$186m) (Based on the trailing twelve months to December 2022).

So, CorVel has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 9.4% earned by companies in a similar industry.

Check out our latest analysis for CorVel

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how CorVel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CorVel Tell Us?

We like the trends that we're seeing from CorVel. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. The amount of capital employed has increased too, by 36%. So we're very much inspired by what we're seeing at CorVel thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that CorVel has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From CorVel's ROCE

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 CorVel has. Since the stock has returned a staggering 286% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

Like most companies, CorVel does come with some risks, and we've found 1 warning sign that you should be aware of.

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.