This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Cortex Business Solutions Inc (CVE:CBX)’s return fundamentals and stock market performance.
Buying Cortex Business Solutions makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to CBX’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Cortex Business Solutions’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
ROCE: Explanation and Calculation
Choosing to invest in Cortex Business Solutions comes at the cost of investing in another potentially favourable 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. To determine Cortex Business Solutions’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Cortex Business Solutions’s ROCE for you below:
ROCE Calculation for CBX
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CA$1.22m ÷ (CA$9.25m – CA$1.54m) = 15.84%
CBX’s 15.84% ROCE means that for every CA$100 you invest, the company creates CA$15.8. This shows Cortex Business Solutions provides a favourable return to capital holders, which beats the 15% ROCE that is typically considered to be a strong benchmark. As a result, if CBX is clever with their reinvestments or dividend payments, investors can grow their capital at an attractive rate over time.
Does this mean I should invest?
Although Cortex Business Solutions is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). Because of this, it is important to look beyond the final value of CBX’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that CBX’s ROCE has increased from -89.34%. Similarly, the movement in the earnings variable shows a jump from -CA$6.88m to CA$1.22m whilst the amount of capital employed fell in response to a decreased level of total assets , which is an indication that Cortex Business Solutions has increased the ROCE for investors by producing more earnings and using less capital.
Cortex Business Solutions’s ROCE has increased in the recent past and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for CBX’s future growth? Take a look at our free research report of analyst consensus for CBX’s outlook.
- Valuation: What is CBX worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CBX is currently mispriced 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.