What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Coda Octopus Group (NASDAQ:CODA) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Coda Octopus Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.056 = US$3.0m ÷ (US$56m - US$3.0m) (Based on the trailing twelve months to July 2024).

Therefore, Coda Octopus Group has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10.0%.

View our latest analysis for Coda Octopus Group

In the above chart we have measured Coda Octopus Group'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 Coda Octopus Group for free.

What Does the ROCE Trend For Coda Octopus Group Tell Us?

When we looked at the ROCE trend at Coda Octopus Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.6% from 22% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Coda Octopus Group have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 11% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Coda Octopus Group does have some risks though, and we've spotted 1 warning sign for Coda Octopus Group that you might be interested in.