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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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, we've noticed some promising trends at AUTO1 Group (ETR:AG1) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for AUTO1 Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0021 = €3.3m ÷ (€2.0b - €430m) (Based on the trailing twelve months to September 2024).
Thus, AUTO1 Group has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.
See our latest analysis for AUTO1 Group
Above you can see how the current ROCE for AUTO1 Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for AUTO1 Group .
What Can We Tell From AUTO1 Group's ROCE Trend?
AUTO1 Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.2% which is a sight for sore eyes. In addition to that, AUTO1 Group is employing 258% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On AUTO1 Group's ROCE
In summary, it's great to see that AUTO1 Group has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 69% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for AG1 that compares the share price and estimated value.