Stock Analysis

Cogent Communications Holdings (NASDAQ:CCOI) Could Become A Multi-Bagger

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NasdaqGS:CCOI
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Cogent Communications Holdings (NASDAQ:CCOI) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Cogent Communications Holdings, this is the formula:

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

0.25 = US$107m ÷ (US$853m - US$423m) (Based on the trailing twelve months to March 2021).

Therefore, Cogent Communications Holdings has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Cogent Communications Holdings

roce
NasdaqGS:CCOI Return on Capital Employed May 6th 2021

In the above chart we have measured Cogent Communications Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Cogent Communications Holdings. The figures show that over the last five years, returns on capital have grown by 188%. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, Cogent Communications Holdings appears to been achieving more with less, since the business is using 27% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Cogent Communications Holdings' ROCE

From what we've seen above, Cogent Communications Holdings has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 146% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Cogent Communications Holdings does have some risks, we noticed 6 warning signs (and 3 which can't be ignored) we think you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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What are the risks and opportunities for Cogent Communications Holdings?

Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access, private network, and data center colocation space services in North America, Europe, Asia, South America, Australia, and Africa.

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Rewards

  • Earnings are forecast to grow 31.84% per year

Risks

  • Interest payments are not well covered by earnings

  • Negative shareholders equity

  • Significant insider selling over the past 3 months

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