Yahoo Finance We Like These Underlying Trends At Cavalier (NZSE:CAV)
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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Cavalier (NZSE:CAV) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Cavalier, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = NZ$3.6m ÷ (NZ$80m - NZ$20m) (Based on the trailing twelve months to December 2020).
Thus, Cavalier has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 20%.
View our latest analysis for Cavalier
Historical performance is a great place to start when researching a stock so above you can see the gauge for Cavalier's ROCE against it's prior returns. If you're interested in investigating Cavalier's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Cavalier Tell Us?
We're pretty happy with how the ROCE has been trending at Cavalier. We found that the returns on capital employed over the last five years have risen by 39%. The company is now earning NZ$0.06 per dollar of capital employed. In regards to capital employed, Cavalier appears to been achieving more with less, since the business is using 45% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
In Conclusion...
In summary, it's great to see that Cavalier has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 31% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Cavalier (of which 1 makes us a bit uncomfortable!) that 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.
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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