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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Coventry Group (ASX:CYG) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Coventry Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = AU$13m ÷ (AU$349m - AU$121m) (Based on the trailing twelve months to June 2024).
Therefore, Coventry Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 12%.
Check out our latest analysis for Coventry Group
Above you can see how the current ROCE for Coventry Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Coventry Group .
How Are Returns Trending?
The fact that Coventry Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.5% which is a sight for sore eyes. In addition to that, Coventry Group is employing 119% 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 Coventry Group's ROCE
Long story short, we're delighted to see that Coventry Group's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 9.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a separate note, we've found 4 warning signs for Coventry Group you'll probably want to know about.