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Avis Budget Group (NASDAQ:CAR) seeks to continue increasing its return on capital
If you’re looking for a multi-bagger, there are a few things you should look out for. Among other things, we want to see two things; firstly, an increasing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Ultimately, this demonstrates that this is a company that is reinvesting profits with increasing rates of return. With that in mind, we noticed some promising trends in Avis Budget Group (NASDAQ:CAR) so let’s look a little deeper.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a metric for evaluating how much pre-tax profit (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation in Avis Budget Group is:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.084 = $2.6 billion ÷ ($34 billion – $3.1 billion) (based on trailing twelve months to March 2024).
That’s why, Avis Budget Group has an ROCE of 8.4%. In itself, this is a low number, but it is around the average of 7.1% generated by the transport industry.
Check out our latest analysis for Avis Budget Group
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In the chart above we measure Avis Budget Group’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, check out our free analyst report for Avis Budget Group .
What the ROCE Trend Can Tell Us
While ROCE is still low in absolute terms, it’s good to see it’s moving in the right direction. The figures show that, over the last five years, the returns generated on capital employed have grown considerably, to 8.4%. The amount of capital employed also increased, by 48%. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.
To complete…
In summary, it’s great to see that Avis Budget Group is able to increase returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients in those highly sought after multi-baggers. And a remarkable 315% total return over the past five years tells us that investors expect more good things to come in the future. Therefore, we thought it would be worth checking whether these trends will continue.
If you want to know some of the risks that the Avis Budget Group faces, we found 4 warning signs (3 are worrying!) that you should know before investing here.
The story continues
While Avis Budget Group isn’t getting the biggest returns, check this out free list of companies that are earning high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.