If you’re looking for a multi-bagger, there’s a few things to keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Cavco Industries (NASDAQ:CVCO) looks decent, right now, so lets see what the trend of returns can tell us.
What is 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 Cavco Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$73m ÷ (US$883m – US$208m) (Based on the trailing twelve months to September 2020).
So, Cavco Industries has an ROCE of 11%. In isolation, that’s a pretty standard return but against the Consumer Durables industry average of 14%, it’s not as good.
Check out our latest analysis for Cavco Industries
In the above chart we have measured Cavco Industries’ prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Cavco Industries’ ROCE Trending?
While the current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 63% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Cavco Industries has consistently earned this amount. 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.
The Key Takeaway
The main thing to remember is that Cavco Industries has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 145% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Cavco Industries could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Cavco Industries 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. 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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