Investors Could Be Concerned With CarMax's (NYSE:KMX) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at CarMax (NYSE:KMX), it didn't seem to tick all of these boxes.

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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 CarMax, this is the formula:

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

0.034 = US$860m ÷ (US$27b - US$2.3b) (Based on the trailing twelve months to May 2025).

Thus, CarMax has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

See our latest analysis for CarMax

Above you can see how the current ROCE for CarMax compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CarMax .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at CarMax, we didn't gain much confidence. Around five years ago the returns on capital were 4.6%, but since then they've fallen to 3.4%. However it looks like CarMax might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On CarMax's ROCE

To conclude, we've found that CarMax is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 47% 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 CarMax has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with CarMax and understanding this should be part of your investment process.

While CarMax 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.