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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Custom Truck One Source (NYSE:CTOS), it didn’t seem to tick all of these boxes.
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Custom Truck One Source:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.053 = US$131m ÷ (US$3.6b – US$1.1b) (Based on the trailing twelve months to September 2024).
Thus, Custom Truck One Source has an ROCE of 5.3%. Ultimately, that’s a low return and it under-performs the Trade Distributors industry average of 12%.
See our latest analysis for Custom Truck One Source
Above you can see how the current ROCE for Custom Truck One Source 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 Custom Truck One Source .
In terms of Custom Truck One Source’s historical ROCE trend, it doesn’t exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 5.3% and the business has deployed 266% more capital into its operations. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
On another note, while the change in ROCE trend might not scream for attention, it’s interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn’t increased to 31% of total assets, this reported ROCE would probably be less than5.3% because total capital employed would be higher.The 5.3% ROCE could be even lower if current liabilities weren’t 31% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.