Charles & Colvard (NASDAQ:CTHR) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Charles & Colvard (NASDAQ:CTHR) looks quite promising in regards to its trends of return on capital.

Understanding 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 Charles & Colvard:

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

0.097 = US$5.9m ÷ (US$67m - US$6.1m) (Based on the trailing twelve months to September 2021).

Therefore, Charles & Colvard has an ROCE of 9.7%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 14%.

View our latest analysis for Charles & Colvard

Above you can see how the current ROCE for Charles & Colvard 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 Charles & Colvard here for free.

How Are Returns Trending?

The fact that Charles & Colvard is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.7% on its capital. Not only that, but the company is utilizing 64% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Charles & Colvard's ROCE

Long story short, we're delighted to see that Charles & Colvard's reinvestment activities have paid off and the company is now profitable. And a remarkable 169% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Charles & Colvard can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 4 warning signs with Charles & Colvard (at least 2 which can't be ignored) , and understanding them would certainly be useful.

While Charles & Colvard 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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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.