What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Camping World Holdings (NYSE:CWH), they do have a high ROCE, but we weren’t exactly elated from how returns are trending.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Camping World Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.27 = US$762m ÷ (US$4.6b – US$1.8b) (Based on the trailing twelve months to June 2022).
Therefore, Camping World Holdings has an ROCE of 27%. In absolute terms that’s a great return and it’s even better than the Specialty Retail industry average of 17%.
Our analysis indicates that CWH is potentially undervalued!
Above you can see how the current ROCE for Camping World Holdings 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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Camping World Holdings doesn’t inspire confidence. To be more specific, while the ROCE is still high, it’s fallen from 34% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Camping World Holdings has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Camping World Holdings’ ROCE
In summary, despite lower returns in the short term, we’re encouraged to see that Camping World Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 21% over the last five years, so there might be an opportunity here for astute investors. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.
Camping World Holdings does have some risks, we noticed 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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Find out whether Camping World Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.