If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at C-Com Satellite Systems (CVE:CMI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 C-Com Satellite Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$2.5m ÷ (CA$22m - CA$620k) (Based on the trailing twelve months to August 2020).
So, C-Com Satellite Systems has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for C-Com Satellite Systems' ROCE against it's prior returns. If you'd like to look at how C-Com Satellite Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From C-Com Satellite Systems' ROCE Trend?
There hasn't been much to report for C-Com Satellite Systems' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at C-Com Satellite Systems in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
In a nutshell, C-Com Satellite Systems has been trudging along with the same returns from the same amount of capital over the last five years. Yet to long term shareholders the stock has gifted them an incredible 242% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to know some of the risks facing C-Com Satellite Systems we've found 5 warning signs (1 is potentially serious!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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