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When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within C-Com Satellite Systems (CVE:CMI), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for C-Com Satellite Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CA$2.8m ÷ (CA$22m - CA$359k) (Based on the trailing twelve months to February 2020).
So, C-Com Satellite Systems has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 9.9% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for C-Com Satellite Systems' ROCE against it's prior returns. If you'd like to look at how C-Com Satellite Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at C-Com Satellite Systems. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect C-Com Satellite Systems to turn into a multi-bagger.
Our Take On C-Com Satellite Systems' ROCE
In summary, it's unfortunate that C-Com Satellite Systems is generating lower returns from the same amount of capital. Since the stock has skyrocketed 214% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you'd like to know more about C-Com Satellite Systems, we've spotted 5 warning signs, and 1 of them is concerning.
While C-Com Satellite Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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