Returns On Capital Signal Tricky Times Ahead For Cognex (NASDAQ:CGNX)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Cognex (NASDAQ:CGNX) and its ROCE trend, we weren't exactly thrilled.

What Is 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. The formula for this calculation on Cognex is:

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

0.049 = US$91m ÷ (US$2.0b - US$169m) (Based on the trailing twelve months to June 2024).

So, Cognex has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10.0%.

See our latest analysis for Cognex

Above you can see how the current ROCE for Cognex 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 analyst report for Cognex .

The Trend Of ROCE

On the surface, the trend of ROCE at Cognex doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Cognex's ROCE

To conclude, we've found that Cognex is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 19% in the last five years. Therefore based on the analysis done in this article, we don't think Cognex has the makings of a multi-bagger.

Like most companies, Cognex does come with some risks, and we've found 1 warning sign that you should be aware of.

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.