If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at ARC Document Solutions (NYSE:ARC) so let's look a bit deeper.
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. To calculate this metric for ARC Document Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = US$18m ÷ (US$302m - US$68m) (Based on the trailing twelve months to September 2023).
Therefore, ARC Document Solutions has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.2% average generated by the Commercial Services industry.
View our latest analysis for ARC Document Solutions
In the above chart we have measured ARC Document Solutions' 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 ARC Document Solutions.
What Can We Tell From ARC Document Solutions' ROCE Trend?
ARC Document Solutions has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 20% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
What We Can Learn From ARC Document Solutions' ROCE
As discussed above, ARC Document Solutions appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 22% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.