To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating American Woodmark (NASDAQ:AMWD), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for American Woodmark, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$163m ÷ (US$1.6b - US$188m) (Based on the trailing twelve months to January 2024).
So, American Woodmark has an ROCE of 12%. In isolation, that's a pretty standard return but against the Building industry average of 16%, it's not as good.
Above you can see how the current ROCE for American Woodmark compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for American Woodmark .
What Does the ROCE Trend For American Woodmark Tell Us?
There hasn't been much to report for American Woodmark's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect American Woodmark to be a multi-bagger going forward.
The Bottom Line
We can conclude that in regards to American Woodmark's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 23% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
American Woodmark could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for AMWD on our platform quite valuable.
While American Woodmark 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.