The Trends At Costa Group Holdings (ASX:CGC) That You Should Know About

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Costa Group Holdings (ASX:CGC) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Costa Group Holdings:

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

0.036 = AU$39m ÷ (AU$1.2b - AU$183m) (Based on the trailing twelve months to December 2019).

So, Costa Group Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 4.7%.

See our latest analysis for Costa Group Holdings

In the above chart we have a measured Costa Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Costa Group Holdings.

How Are Returns Trending?

When we looked at the ROCE trend at Costa Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 7.7%, but since then they've fallen to 3.6%. However it looks like Costa Group Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Costa Group Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Costa Group Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 34% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Costa Group Holdings has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Costa Group Holdings you'll probably want to know about.

While Costa Group Holdings 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. 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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