USA Truck (NASDAQ:USAK) Is Experiencing Growth In Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return.
Speaking of which, we noticed some great changes in USA Truck’s (NASDAQ:USAK) returns on capital, so let’s have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for USA Truck: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) / (Total Assets – Current Liabilities)
0.15 = US£43m / (US£401m – US£105m) (Based on the trailing twelve months to March 2022). Therefore, USA Truck has an ROCE of 15%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Transportation industry average of 14%. View our latest analysis for USA Truck
In the above chart we have measured USA Truck’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 report on analyst forecasts for the company.
So How Is USA Truck’s ROCE Trending?
USA Truck has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 15% on its capital. And unsurprisingly, like most companies trying to break into the black, USA Truck is utilizing 40% more capital than it was five years ago.
We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Overall, USA Truck gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 126% to shareholders over the last five years, it looks like investors are recognizing these changes.
Therefore, we think it would be worth your time to check if these trends are going to continue. One final note, you should learn about the 2 warning signs we’ve spotted with USA Truck (including 1 which makes us a bit uncomfortable) . While USA Truck may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity.
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.