What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Art's-Way Manufacturing (NASDAQ:ARTW) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Art's-Way Manufacturing:

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

0.042 = US$608k ÷ (US$24m - US$9.7m) (Based on the trailing twelve months to February 2024).

Thus, Art's-Way Manufacturing has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

Check out our latest analysis for Art's-Way Manufacturing

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Art's-Way Manufacturing has performed in the past in other metrics, you can view this free graph of Art's-Way Manufacturing's past earnings, revenue and cash flow.

What Can We Tell From Art's-Way Manufacturing's ROCE Trend?

Shareholders will be relieved that Art's-Way Manufacturing has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.2%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Art's-Way Manufacturing's ROCE

In summary, we're delighted to see that Art's-Way Manufacturing has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Art's-Way Manufacturing does come with some risks, and we've found 1 warning sign that you should be aware of.

While Art's-Way Manufacturing isn't earning the highest return, check out this free list of companies that are 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.