Coventry Group (ASX:CYG) Is Looking To Continue Growing Its Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Coventry Group's (ASX:CYG) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Coventry Group, this is the formula:

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

0.055 = AU$13m ÷ (AU$349m - AU$121m) (Based on the trailing twelve months to June 2024).

Therefore, Coventry Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 11%.

Check out our latest analysis for Coventry Group

Above you can see how the current ROCE for Coventry Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Coventry Group for free.

So How Is Coventry Group's ROCE Trending?

The fact that Coventry Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.5% which is a sight for sore eyes. In addition to that, Coventry Group is employing 119% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Coventry Group's ROCE

In summary, it's great to see that Coventry Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 31% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 4 warning signs with Coventry Group and understanding them should be part of your investment process.

While Coventry Group 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. 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.