If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Columbus McKinnon (NASDAQ:CMCO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Columbus McKinnon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$41m ÷ (US$1.1b - US$156m) (Based on the trailing twelve months to September 2020).
Therefore, Columbus McKinnon has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.
In the above chart we have measured Columbus McKinnon's 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 Columbus McKinnon here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Columbus McKinnon doesn't inspire confidence. To be more specific, ROCE has fallen from 8.1% 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.
From the above analysis, we find it rather worrisome that returns on capital and sales for Columbus McKinnon have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 97% return to shareholders over the last five years, so investors might be expecting the trends to turn around. 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 want to continue researching Columbus McKinnon, you might be interested to know about the 4 warning signs that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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