Yahoo Finance Returns On Capital Signal Tricky Times Ahead For Cobram Estate Olives (ASX:CBO)
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Cobram Estate Olives (ASX:CBO) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Cobram Estate Olives, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = AU$6.5m ÷ (AU$551m - AU$39m) (Based on the trailing twelve months to June 2022).
Thus, Cobram Estate Olives has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Food industry average of 5.0%.
Check out our latest analysis for Cobram Estate Olives
Above you can see how the current ROCE for Cobram Estate Olives compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cobram Estate Olives here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Cobram Estate Olives doesn't inspire confidence. Around five years ago the returns on capital were 8.8%, but since then they've fallen to 1.3%. However it looks like Cobram Estate Olives might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Cobram Estate Olives' ROCE
Bringing it all together, while we're somewhat encouraged by Cobram Estate Olives' reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 21% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 2 warning signs for Cobram Estate Olives (of which 1 shouldn't be ignored!) that you should know about.
While Cobram Estate Olives 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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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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