Returns Are Gaining Momentum At Sonic Automotive (NYSE:SAH)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Sonic Automotive (NYSE:SAH) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sonic Automotive is:

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

0.17 = US$514m ÷ (US$5.4b - US$2.3b) (Based on the trailing twelve months to March 2024).

So, Sonic Automotive has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Specialty Retail industry.

See our latest analysis for Sonic Automotive

Above you can see how the current ROCE for Sonic Automotive 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 Sonic Automotive .

What Does the ROCE Trend For Sonic Automotive Tell Us?

We like the trends that we're seeing from Sonic Automotive. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 43%. So we're very much inspired by what we're seeing at Sonic Automotive thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Sonic Automotive has a current liabilities to total assets ratio of 43%, 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 Sonic Automotive's ROCE

All in all, it's terrific to see that Sonic Automotive is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

One more thing: We've identified 2 warning signs with Sonic Automotive (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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.

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