Returns At Coats Group (LON:COA) Appear To Be Weighed Down

By
Simply Wall St
Published
May 16, 2022
LSE:COA
Source: Shutterstock

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Coats Group (LON:COA), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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$186m ÷ (US$1.5b - US$456m) (Based on the trailing twelve months to December 2021).

Thus, 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.

See our latest analysis for Coats Group

roce
LSE:COA Return on Capital Employed May 16th 2022

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'd like to see what analysts are forecasting going forward, you should check out our free report for Coats Group.

The Trend Of ROCE

Things have been pretty stable at Coats Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Coats Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Coats Group has done well to reduce current liabilities to 30% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Coats Group's ROCE

In a nutshell, Coats Group has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 7.6% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 1 warning sign for Coats Group that we think you should be aware of.

While Coats Group 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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