Investors Could Be Concerned With Cognex's (NASDAQ:CGNX) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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 Cognex (NASDAQ:CGNX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Cognex:

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

0.12 = US$204m ÷ (US$2.0b - US$214m) (Based on the trailing twelve months to April 2023).

So, Cognex has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Electronic industry.

View our latest analysis for Cognex

In the above chart we have measured Cognex's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cognex.

What Does the ROCE Trend For Cognex Tell Us?

On the surface, the trend of ROCE at Cognex doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 22% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On Cognex's ROCE

In summary, we're somewhat concerned by Cognex's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 25% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

While Cognex doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Cognex 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.