Avis Budget Group's (NASDAQ:CAR) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Avis Budget Group (NASDAQ:CAR) and its trend of ROCE, we really liked what we saw.

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

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. Analysts use this formula to calculate it for Avis Budget Group:

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

0.16 = US$3.8b ÷ (US$26b - US$2.9b) (Based on the trailing twelve months to June 2022).

Therefore, Avis Budget Group has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Transportation industry.

Our analysis indicates that CAR is potentially undervalued!

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 to see what analysts are forecasting going forward, you should check out our free report for Avis Budget Group.

What Does the ROCE Trend For Avis Budget Group Tell Us?

We like the trends that we're seeing from Avis Budget Group. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 23%. So we're very much inspired by what we're seeing at Avis Budget Group thanks to its ability to profitably reinvest capital.

What We Can Learn From Avis Budget Group's ROCE

In summary, it's great to see that Avis Budget Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 344% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Avis Budget Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While Avis Budget Group 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.