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When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Cameco (TSE:CCO), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cameco is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = CA$74m ÷ (CA$7.4b - CA$325m) (Based on the trailing twelve months to September 2021).
Therefore, Cameco has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.3%.
Check out our latest analysis for Cameco
In the above chart we have measured Cameco's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Cameco here for free.
What Can We Tell From Cameco's ROCE Trend?
There is reason to be cautious about Cameco, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cameco becoming one if things continue as they have.
In Conclusion...
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Since the stock has skyrocketed 104% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know about the risks facing Cameco, we've discovered 1 warning sign that you should be aware of.