Should You Be Impressed By Crookes Brothers' (JSE:CKS) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Crookes Brothers (JSE:CKS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Crookes Brothers is:

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).

Thus, Crookes Brothers has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

See our latest analysis for Crookes Brothers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Crookes Brothers' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Crookes Brothers, check out these free graphs here.

What Does the ROCE Trend For Crookes Brothers Tell Us?

The returns on capital haven't changed much for Crookes Brothers in recent years. Over the past five years, ROCE has remained relatively flat at around 5.4% and the business has deployed 50% more capital into its operations. 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.

Our Take On Crookes Brothers' ROCE

As we've seen above, Crookes Brothers' returns on capital haven't increased but it is reinvesting in the business. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Crookes Brothers has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Crookes Brothers (including 1 which is concerning) .

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. 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.
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