Be Wary Of Cooper Companies (NYSE:COO) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Cooper Companies (NYSE:COO) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Cooper Companies:

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

0.056 = US$567m ÷ (US$12b - US$1.4b) (Based on the trailing twelve months to July 2022).

So, Cooper Companies has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.3%.

View our latest analysis for Cooper Companies

Above you can see how the current ROCE for Cooper Companies compares to its prior returns on capital, but there's only so much you can tell from the past. 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 Cooper Companies' ROCE Trend?

In terms of Cooper Companies' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Cooper Companies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Cooper Companies is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 9.5% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Cooper Companies does have some risks though, and we've spotted 1 warning sign for Cooper Companies that you might be interested in.

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.