If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Karooooo (NASDAQ:KARO), we liked what we saw.

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 Karooooo, this is the formula:

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

0.35 = R1.2b ÷ (R4.4b - R1.1b) (Based on the trailing twelve months to August 2024).

Therefore, Karooooo has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.

Check out our latest analysis for Karooooo

In the above chart we have measured Karooooo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Karooooo for free.

The Trend Of ROCE

It's hard not to be impressed by Karooooo's returns on capital. The company has consistently earned 35% for the last five years, and the capital employed within the business has risen 154% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In summary, we're delighted to see that Karooooo has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 36% to shareholders over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Karooooo does have some risks though, and we've spotted 1 warning sign for Karooooo that you might be interested in.

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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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.