Should We Be Excited About The Trends Of Returns At AMCON Distributing (NYSEMKT:DIT)? - Simply Wall St
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at AMCON Distributing (NYSEMKT:DIT) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AMCON Distributing is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.059 = US$8.2m ÷ (US$177m – US$37m) (Based on the trailing twelve months to June 2020).
Thus, AMCON Distributing has an ROCE of 5.9%. Ultimately, that’s a low return and it under-performs the Retail Distributors industry average of 16%.
See our latest analysis for AMCON Distributing
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 AMCON Distributing has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at AMCON Distributing, we didn’t gain much confidence. Around five years ago the returns on capital were 13%, but since then they’ve fallen to 5.9%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
Bringing it all together, while we’re somewhat encouraged by AMCON Distributing’s reinvestment in its own business, we’re aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 23% in the last five years. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
AMCON Distributing does have some risks, we noticed 6 warning signs (and 2 which make us uncomfortable) we think you should know about.
While AMCON Distributing may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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