Investors Met With Slowing Returns on Capital At ARC Document Solutions (NYSE:ARC)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at ARC Document Solutions (NYSE:ARC), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on ARC Document Solutions is:

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

0.079 = US$19m ÷ (US$310m - US$73m) (Based on the trailing twelve months to September 2022).

Therefore, ARC Document Solutions has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.3% average generated by the Commercial Services industry.

Check out our latest analysis for ARC Document Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for ARC Document Solutions' ROCE against it's prior returns. If you're interested in investigating ARC Document Solutions' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for ARC Document Solutions' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect ARC Document Solutions to be a multi-bagger going forward.

The Bottom Line

In a nutshell, ARC Document Solutions has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 23% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 1 warning sign with ARC Document Solutions and understanding this should be part of your investment process.

While ARC Document Solutions 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.

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