Be Wary Of Ceapro (CVE:CZO) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ceapro (CVE:CZO) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Ceapro is:

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

0.074 = CA$2.1m ÷ (CA$29m - CA$1.1m) (Based on the trailing twelve months to March 2021).

Therefore, Ceapro has an ROCE of 7.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.0%.

View our latest analysis for Ceapro

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ceapro, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Ceapro's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 57%, but since then they've fallen to 7.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Ceapro has decreased its current liabilities to 3.8% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Ceapro's ROCE

While returns have fallen for Ceapro in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 76% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you want to know some of the risks facing Ceapro we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Ceapro 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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