CF Energy (CVE:CFY) Is Reinvesting At Lower Rates Of Return

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating CF Energy (CVE:CFY), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on CF Energy is:

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

0.11 = CN¥63m ÷ (CN¥898m - CN¥309m) (Based on the trailing twelve months to September 2020).

So, CF Energy has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Gas Utilities industry.

View our latest analysis for CF Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for CF Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CF Energy, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at CF Energy doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On CF Energy's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for CF Energy have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 133%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

CF Energy does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While CF Energy 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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This article by Simply Wall St is general in nature. 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.
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