Crookes Brothers (JSE:CKS) Hasn't Managed To Accelerate Its Returns

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Crookes Brothers (JSE:CKS) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Crookes Brothers:

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

0.054 = R83m ÷ (R1.8b - R283m) (Based on the trailing twelve months to September 2020).

So, Crookes Brothers has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 13%.

See our latest analysis for Crookes Brothers

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Crookes Brothers' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Crookes Brothers' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 50% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Crookes Brothers' returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Crookes Brothers (of which 1 is a bit unpleasant!) that you should know about.

While Crookes Brothers 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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