CoTec Holdings (CVE:CTH) Has More To Do To Multiply In Value Going Forward

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at CoTec Holdings (CVE:CTH), it didn't seem to tick all of these boxes.

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 CoTec Holdings:

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

0.058 = CA$971k ÷ (CA$18m - CA$843k) (Based on the trailing twelve months to March 2023).

Therefore, CoTec Holdings has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 19%.

Check out our latest analysis for CoTec Holdings

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

SWOT Analysis for CoTec Holdings

How Are Returns Trending?

Over the past , CoTec Holdings' ROCE and capital employed have both remained mostly flat. 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 CoTec Holdings to be a multi-bagger going forward.

The Bottom Line On CoTec Holdings' ROCE

In a nutshell, CoTec Holdings has been trudging along with the same returns from the same amount of capital over the last . Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 358% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 4 warning signs with CoTec Holdings (at least 1 which is potentially serious) , and understanding these would certainly be useful.

While CoTec Holdings 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.