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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at America's Car-Mart (NASDAQ:CRMT), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for America's Car-Mart:

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

0.045 = US$67m ÷ (US$1.6b - US$75m) (Based on the trailing twelve months to October 2024).

So, America's Car-Mart has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 13%.

See our latest analysis for America's Car-Mart

Above you can see how the current ROCE for America's Car-Mart compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

We weren't thrilled with the trend because America's Car-Mart's ROCE has reduced by 69% over the last five years, while the business employed 176% more capital. That being said, America's Car-Mart raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence America's Car-Mart might not have received a full period of earnings contribution from it.

What We Can Learn From 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 investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing America's Car-Mart we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While America's Car-Mart may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.