Our Take On The Returns On Capital At CTT Systems (STO:CTT)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at CTT Systems (STO:CTT) 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)?

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 CTT Systems is:

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

0.15 = kr40m ÷ (kr324m - kr60m) (Based on the trailing twelve months to September 2020).

Therefore, CTT Systems has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Aerospace & Defense industry.

See our latest analysis for CTT Systems

Above you can see how the current ROCE for CTT Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CTT Systems here for free.

So How Is CTT Systems' ROCE Trending?

When we looked at the ROCE trend at CTT Systems, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 15%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, CTT Systems has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On CTT Systems' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for CTT Systems have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 225% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about CTT Systems, we've spotted 3 warning signs, and 1 of them is significant.

While CTT Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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