Stock Analysis

Here's What To Make Of Cogent Communications Holdings' (NASDAQ:CCOI) Decelerating Rates Of Return

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NasdaqGS:CCOI
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Cogent Communications Holdings (NASDAQ:CCOI) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Cogent Communications Holdings is:

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

0.12 = US$110m ÷ (US$1.0b - US$99m) (Based on the trailing twelve months to September 2021).

Therefore, Cogent Communications Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Telecom industry.

See our latest analysis for Cogent Communications Holdings

roce
NasdaqGS:CCOI Return on Capital Employed December 23rd 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.

So How Is Cogent Communications Holdings' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 63% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Cogent Communications Holdings has consistently earned this amount. 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, Cogent Communications Holdings has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 120% 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.

One more thing: We've identified 5 warning signs with Cogent Communications Holdings (at least 3 which are potentially serious) , and understanding them would certainly be useful.

While Cogent Communications Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Cogent Communications Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:CCOI

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.

Moderate growth potential second-rate dividend payer.