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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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, the ROCE of CoTec Holdings (CVE:CTH) looks great, so lets see what the trend can tell us.
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. Analysts use this formula to calculate it for CoTec Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$8.2m ÷ (CA$42m - CA$1.5m) (Based on the trailing twelve months to September 2024).
Therefore, CoTec Holdings has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.
See our latest analysis for CoTec Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for CoTec Holdings' ROCE against it's prior returns. If you'd like to look at how CoTec Holdings has performed in the past in other metrics, you can view this free graph of CoTec Holdings' past earnings, revenue and cash flow.
So How Is CoTec Holdings' ROCE Trending?
We're delighted to see that CoTec Holdings is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 20% on its capital. In addition to that, CoTec Holdings is employing 44,210% 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.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 3.5%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.