I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in CanWel Building Materials Group Ltd (TSE:CWX).
CanWel Building Materials Group stock represents an ownership share in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in CanWel Building Materials Group, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
CanWel Building Materials Group’s Return On Capital Employed
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at CanWel Building Materials Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated CanWel Building Materials Group’s ROCE for you below:
ROCE Calculation for CWX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CA$51m ÷ (CA$898m – CA$161m) = 6.9%
The calculation above shows that CWX’s earnings were 6.9% of capital employed. This makes CanWel Building Materials Group unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.
What is causing this?
The underperforming ROCE is not ideal for CanWel Building Materials Group investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, CWX’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, CWX’s ROCE was 5.3%, which means the company’s capital returns have improved. With this, the current earnings of CA$51m improved from CA$16m and capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.
Despite CWX’s current ROCE remains at an unattractive level, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate CWX or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for CWX’s future growth? Take a look at our free research report of analyst consensus for CWX’s outlook.
- Valuation: What is CWX worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether CWX is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.