Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Cogeco (TSE:CGO) and its ROCE trend, we weren’t exactly thrilled.
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. Analysts use this formula to calculate it for Cogeco:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.096 = CA$649m ÷ (CA$7.4b – CA$580m) (Based on the trailing twelve months to May 2020).
Thus, Cogeco has an ROCE of 9.6%. Even though it’s in line with the industry average of 9.9%, it’s still a low return by itself.
Above you can see how the current ROCE for Cogeco compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Cogeco.
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we’re seeing at Cogeco. The company has consistently earned 9.6% for the last five years, and the capital employed within the business has risen 35% in that time. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
The Bottom Line
Long story short, while Cogeco has been reinvesting its capital, the returns that it’s generating haven’t increased. Since the stock has gained an impressive 67% over the last five years, investors must think there’s better things to come. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
Cogeco does have some risks though, and we’ve spotted 1 warning sign for Cogeco that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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