If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at America's Car-Mart (NASDAQ:CRMT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on America's Car-Mart is:

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

0.018 = US$26m ÷ (US$1.5b - US$58m) (Based on the trailing twelve months to April 2024).

Therefore, America's Car-Mart has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

In the above chart we have measured America's Car-Mart'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 America's Car-Mart for free.

What Can We Tell From America's Car-Mart's ROCE Trend?

On the surface, the trend of ROCE at America's Car-Mart doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.8% from 15% five years ago. 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 America's Car-Mart's ROCE

Bringing it all together, while we're somewhat encouraged by America's Car-Mart's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 46% 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 America's Car-Mart has the makings of a multi-bagger.

If you want to continue researching America's Car-Mart, you might be interested to know about the 1 warning sign that our analysis has discovered.

While America's Car-Mart 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.