Returns On Capital At Aaron's Company (NYSE:AAN) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Aaron's Company (NYSE:AAN), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Aaron's Company, this is the formula:

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

0.12 = US$168m ÷ (US$1.9b - US$399m) (Based on the trailing twelve months to December 2022).

Therefore, Aaron's Company has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 14%.

See our latest analysis for Aaron's Company

Above you can see how the current ROCE for Aaron's Company 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.

So How Is Aaron's Company's ROCE Trending?

There hasn't been much to report for Aaron's Company's returns and its level of capital employed because both metrics have been steady for the past four years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Aaron's Company doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In a nutshell, Aaron's Company has been trudging along with the same returns from the same amount of capital over the last four years. Since the stock has declined 48% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Aaron's Company has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Aaron's Company that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.