Coats Group (LON:COA) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Coats Group (LON:COA) and its trend of ROCE, we really liked what we saw.

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 Coats Group:

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

0.18 = US$174m ÷ (US$1.4b - US$448m) (Based on the trailing twelve months to June 2021).

Therefore, Coats Group has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 19% generated by the Luxury industry.

View our latest analysis for Coats Group

In the above chart we have measured Coats Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Coats Group's ROCE Trend?

Coats Group has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 71% over the trailing five years. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, Coats Group appears to been achieving more with less, since the business is using 27% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line

From what we've seen above, Coats Group has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 21% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.