The Returns On Capital At America's Car-Mart (NASDAQ:CRMT) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at America's Car-Mart (NASDAQ:CRMT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for America's Car-Mart, this is the formula:

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

0.019 = US$27m ÷ (US$1.5b - US$55m) (Based on the trailing twelve months to October 2023).

Thus, America's Car-Mart has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

Check out our latest analysis for America's Car-Mart

Above you can see how the current ROCE for America's Car-Mart compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at America's Car-Mart doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On America's Car-Mart's ROCE

Bringing it all together, while we're somewhat encouraged by America's Car-Mart's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think America's Car-Mart has the makings of a multi-bagger.

On a final note, we found 2 warning signs for America's Car-Mart (1 makes us a bit uncomfortable) you should be aware of.

While America's Car-Mart 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.