If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Commercial Vehicle Group’s (NASDAQ:CVGI) trend of ROCE, we liked what we saw.
Understanding 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 Commercial Vehicle Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = US$38m ÷ (US$557m – US$193m) (Based on the trailing twelve months to June 2022).
Thus, Commercial Vehicle Group has an ROCE of 10%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 10%.
View our latest analysis for Commercial Vehicle Group
In the above chart we have measured Commercial Vehicle 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 Commercial Vehicle Group.
So How Is Commercial Vehicle Group’s ROCE Trending?
While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 39% more capital into its operations. Since 10% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
To sum it up, Commercial Vehicle Group has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 25% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it’s a prime investment.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for Commercial Vehicle Group (of which 1 is a bit concerning!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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