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What are the early trends we should look for to identify a stock that could 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. So on that note, Cooks Coffee (NZSE:CCC) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 Cooks Coffee is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = NZ$1.1m ÷ (NZ$30m - NZ$8.7m) (Based on the trailing twelve months to September 2024).
Therefore, Cooks Coffee has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.3%.
Check out our latest analysis for Cooks Coffee
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Cooks Coffee.
What Does the ROCE Trend For Cooks Coffee Tell Us?
We're delighted to see that Cooks Coffee is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.0% which is a sight for sore eyes. In addition to that, Cooks Coffee is employing 24% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Cooks Coffee's ROCE
Overall, Cooks Coffee gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has dived 70% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Cooks Coffee does have some risks, we noticed 6 warning signs (and 3 which don't sit too well with us) we think you should know about.