What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in EverQuote's (NASDAQ:EVER) returns on capital, so let's have a look.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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 EverQuote is:

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

0.23 = US$32m ÷ (US$211m - US$73m) (Based on the trailing twelve months to December 2024).

So, EverQuote has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 7.4%.

View our latest analysis for EverQuote

In the above chart we have measured EverQuote's 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 analyst report for EverQuote .

What Can We Tell From EverQuote's ROCE Trend?

The fact that EverQuote is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 23% on its capital. In addition to that, EverQuote is employing 161% 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.

The Bottom Line

To the delight of most shareholders, EverQuote has now broken into profitability. And since the stock has fallen 43% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for EverQuote you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.