Yahoo Finance CPS Technologies (NASDAQ:CPSH) Is Experiencing Growth In Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at CPS Technologies (NASDAQ:CPSH) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for CPS Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$1.7m ÷ (US$19m - US$4.2m) (Based on the trailing twelve months to July 2022).
Therefore, CPS Technologies has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
Check out our latest analysis for CPS Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for CPS Technologies' ROCE against it's prior returns. If you'd like to look at how CPS Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that CPS Technologies is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 49% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In Conclusion...
In summary, it's great to see that CPS Technologies has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 222% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know more about CPS Technologies, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
While CPS Technologies 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.
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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.
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