If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at the ROCE trend of Aaron's Company (NYSE:AAN) we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Aaron's Company is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$243m ÷ (US$1.4b - US$259m) (Based on the trailing twelve months to September 2021).
So, Aaron's Company has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.
In the above chart we have measured Aaron's Company's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Aaron's Company here for free.
What Can We Tell From Aaron's Company's ROCE Trend?
We're pretty happy with how the ROCE has been trending at Aaron's Company. The figures show that over the last two years, returns on capital have grown by 89%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 26% less capital than it was two years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Key Takeaway
In summary, it's great to see that Aaron's Company has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 27% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to know some of the risks facing Aaron's Company we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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.
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