Avis Budget Group (NASDAQ:CAR) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Avis Budget Group (NASDAQ:CAR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Avis Budget Group, this is the formula:

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

0.03 = US$771m ÷ (US$29b - US$3.4b) (Based on the trailing twelve months to March 2025).

Therefore, Avis Budget Group has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.1%.

See our latest analysis for Avis Budget Group

In the above chart we have measured Avis Budget Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Avis Budget Group for free.

What The Trend Of ROCE Can Tell Us

In terms of Avis Budget Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.9% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Avis Budget Group's ROCE

To conclude, we've found that Avis Budget Group is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 415% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing Avis Budget Group that you might find interesting.

While Avis Budget Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.