Cyanotech Corporation (NASDAQ:CYAN): A Look At Return On Capital

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Cyanotech Corporation (NASDAQ:CYAN)’s return fundamentals and stock market performance.

Buying Cyanotech makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Cyanotech’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

View our latest analysis for Cyanotech

Calculating Return On Capital Employed for CYAN

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Cyanotech’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Cyanotech’s ROCE for you below:

ROCE Calculation for CYAN

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US$915.00k ÷ (US$29.71m – US$5.71m) = 3.81%

As you can see, CYAN earned $3.8 from every $100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Cyanotech is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

NasdaqCM:CYAN Last Perf July 31st 18
NasdaqCM:CYAN Last Perf July 31st 18

What is causing this?

CYAN doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking at the past 3 year period shows us that CYAN boosted investor return on capital employed from 0.93%. Similarly, the movement in the earnings variable shows a jump from US$229.00k to US$915.00k whilst capital employed fell as a result of a decreased level of total assets and a larger reliance on current liabilities (increased borrowing to fund operations) , which is an indication that Cyanotech has increased the ROCE for investors by producing more earnings and using less capital.

Next Steps

ROCE for CYAN investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

  1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Cyanotech’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  2. Valuation: What is CYAN worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether CYAN is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.