In This Article:
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Cooper-Standard Holdings (NYSE:CPS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Cooper-Standard Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$58m ÷ (US$1.8b - US$648m) (Based on the trailing twelve months to September 2024).
Therefore, Cooper-Standard Holdings has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 11%.
View our latest analysis for Cooper-Standard Holdings
In the above chart we have measured Cooper-Standard 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 Cooper-Standard Holdings .
How Are Returns Trending?
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 41% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 5.0%, it's hard to get excited about these developments.
The Key Takeaway
It's a shame to see that Cooper-Standard Holdings is effectively shrinking in terms of its capital base. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Cooper-Standard Holdings has the makings of a multi-bagger.
Cooper-Standard Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...