What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 2 Cheap Cars Group (NZSE:2CC) looks attractive 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. The formula for this calculation on 2 Cheap Cars Group is:

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

0.26 = NZ$6.4m ÷ (NZ$32m - NZ$6.7m) (Based on the trailing twelve months to September 2023).

Thus, 2 Cheap Cars Group has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.

See our latest analysis for 2 Cheap Cars Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating 2 Cheap Cars Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From 2 Cheap Cars Group's ROCE Trend?

2 Cheap Cars Group deserves to be commended in regards to it's returns. The company has consistently earned 26% for the last two years, and the capital employed within the business has risen 29% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last two years, the reduction in current liabilities to 21% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On 2 Cheap Cars Group's ROCE

In short, we'd argue 2 Cheap Cars Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 166% return over the last year, 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.