What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Sonic Automotive (NYSE:SAH) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Sonic Automotive, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$514m ÷ (US$5.1b - US$2.0b) (Based on the trailing twelve months to December 2023).
Therefore, Sonic Automotive has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 14% it's much better.
Above you can see how the current ROCE for Sonic Automotive compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sonic Automotive .
How Are Returns Trending?
Sonic Automotive is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 61%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Sonic Automotive's ROCE
To sum it up, Sonic Automotive has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
Sonic Automotive does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.