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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Cadre Holdings (NYSE:CDRE) 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 Cadre Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$61m ÷ (US$617m - US$95m) (Based on the trailing twelve months to September 2024).
Therefore, Cadre Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Aerospace & Defense industry.
View our latest analysis for Cadre Holdings
In the above chart we have measured Cadre Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cadre Holdings .
What Can We Tell From Cadre Holdings' ROCE Trend?
We weren't thrilled with the trend because Cadre Holdings' ROCE has reduced by 34% over the last four years, while the business employed 130% more capital. That being said, Cadre Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Cadre Holdings might not have received a full period of earnings contribution from it. Additionally, we found that Cadre Holdings' most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
The Bottom Line On Cadre Holdings' ROCE
Bringing it all together, while we're somewhat encouraged by Cadre Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 53% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.