Yahoo Finance Capital Allocation Trends At Copart (NASDAQ:CPRT) Aren't Ideal
What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Copart (NASDAQ:CPRT), it does have a high ROCE right now, but lets see how returns are trending.
Return On Capital Employed (ROCE): What Is It?
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 Copart, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$1.6b ÷ (US$8.0b - US$563m) (Based on the trailing twelve months to April 2024).
Thus, Copart has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 9.8%.
View our latest analysis for Copart
In the above chart we have measured Copart'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 Copart .
What Does the ROCE Trend For Copart Tell Us?
On the surface, the trend of ROCE at Copart doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 31%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Copart's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Copart. And long term investors must be optimistic going forward because the stock has returned a huge 184% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know about the risks facing Copart, we've discovered 1 warning sign that you should be aware of.
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.
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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.
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