Stock Analysis

Should We Be Excited About The Trends Of Returns At Cognex (NASDAQ:CGNX)?

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NasdaqGS:CGNX
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So, when we ran our eye over Cognex's (NASDAQ:CGNX) trend of ROCE, we liked what we saw.

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 Cognex:

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

0.12 = US$206m ÷ (US$1.8b - US$132m) (Based on the trailing twelve months to December 2020).

Therefore, Cognex has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

View our latest analysis for Cognex

roce
NasdaqGS:CGNX Return on Capital Employed February 23rd 2021

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'd like to see what analysts are forecasting going forward, you should check out our free report for Cognex.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 100% more capital in the last five years, and the returns on that capital have remained stable at 12%. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

To sum it up, Cognex has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 378% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

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

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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