What Can The Trends At CeoTronics (FRA:CEK) Tell Us About Their Returns?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at CeoTronics (FRA:CEK) so let's look a bit deeper.

What is 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 CeoTronics is:

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

0.17 = €2.5m ÷ (€24m - €9.8m) (Based on the trailing twelve months to May 2020).

Thus, CeoTronics has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Communications industry.

Check out our latest analysis for CeoTronics

In the above chart we have measured CeoTronics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CeoTronics here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that CeoTronics is reaping rewards from its investments and has now broken into profitability. The company now earns 17% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

To bring it all together, CeoTronics has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 66% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing CeoTronics we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While CeoTronics 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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