Returns On Capital At Cogent Communications Holdings (NASDAQ:CCOI) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at Cogent Communications Holdings' (NASDAQ:CCOI) ROCE trend, we were pretty happy with what we saw.

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. Analysts use this formula to calculate it for Cogent Communications Holdings:

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

0.13 = US$113m ÷ (US$998m - US$127m) (Based on the trailing twelve months to March 2023).

Therefore, Cogent Communications Holdings has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 6.8% it's much better.

Check out our latest analysis for Cogent Communications Holdings

Above you can see how the current ROCE for Cogent Communications Holdings 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 report on analyst forecasts for the company.

SWOT Analysis for Cogent Communications Holdings

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% 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.

Our Take On Cogent Communications Holdings' ROCE

To sum it up, Cogent Communications Holdings has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 49% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Cogent Communications Holdings does have some risks, we noticed 6 warning signs (and 3 which don't sit too well with us) we think you should know about.

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.