Returns on Capital Paint A Bright Future For CoTec Holdings (CVE:CTH)

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of CoTec Holdings (CVE:CTH) we really liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.20 = CA$8.2m ÷ (CA$42m - CA$1.5m) (Based on the trailing twelve months to September 2024).

So, CoTec Holdings has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of CoTec Holdings.

How Are Returns Trending?

CoTec Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses three years ago, but now it's earning 20% which is a sight for sore eyes. In addition to that, CoTec Holdings is employing 44,210% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 3.5%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that CoTec Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

Overall, CoTec Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

CoTec Holdings does have some risks though, and we've spotted 2 warning signs for CoTec Holdings that you might be interested in.

CoTec Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.