CorVel (NASDAQ:CRVL) Knows How To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of CorVel (NASDAQ:CRVL) looks attractive right now, so lets see what the trend of returns can tell us.

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 CorVel is:

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

0.31 = US$78m ÷ (US$424m - US$171m) (Based on the trailing twelve months to December 2021).

Thus, CorVel has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for CorVel

Historical performance is a great place to start when researching a stock so above you can see the gauge for CorVel's ROCE against it's prior returns. If you're interested in investigating CorVel's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CorVel Tell Us?

In terms of CorVel's history of ROCE, it's quite impressive. The company has employed 69% more capital in the last five years, and the returns on that capital have remained stable at 31%. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If CorVel can keep this up, we'd be very optimistic about its future.

On a side note, CorVel's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On CorVel's ROCE

In short, we'd argue CorVel has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 324% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

CorVel does have some risks though, and we've spotted 1 warning sign for CorVel that you might be interested in.

CorVel 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.

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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.