What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of AutoNation (NYSE:AN) we really 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. Analysts use this formula to calculate it for AutoNation:

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

0.23 = US$1.5b ÷ (US$12b - US$5.4b) (Based on the trailing twelve months to March 2024).

So, AutoNation has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Above you can see how the current ROCE for AutoNation 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 AutoNation .

So How Is AutoNation's ROCE Trending?

Investors would be pleased with what's happening at AutoNation. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 33% more capital is being employed now too. So we're very much inspired by what we're seeing at AutoNation thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that AutoNation has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On AutoNation's ROCE

To sum it up, AutoNation 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. In light of that, we think it's worth looking further into this stock because if AutoNation can keep these trends up, it could have a bright future ahead.

AutoNation does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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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