Cavco Industries (NASDAQ:CVCO) Has More To Do To Multiply In Value Going Forward

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Cavco Industries' (NASDAQ:CVCO) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Cavco Industries, this is the formula:

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

0.16 = US$177m ÷ (US$1.4b - US$273m) (Based on the trailing twelve months to March 2024).

Thus, Cavco Industries has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Consumer Durables industry.

Check out our latest analysis for Cavco Industries

roce

In the above chart we have measured Cavco Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cavco Industries .

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 96% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Cavco Industries has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Cavco Industries' ROCE

In the end, Cavco Industries has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 122% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Cavco Industries doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for CVCO on our platform.

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.

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.

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