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Is Cameco (TSE:CCO) Shrinking?

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·3 min read
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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Cameco (TSE:CCO) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Cameco is:

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

0.016 = CA$113m ÷ (CA$7.6b - CA$304m) (Based on the trailing twelve months to December 2020).

Thus, Cameco has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.1%.

View our latest analysis for Cameco

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In the above chart we have measured Cameco's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cameco.

What Does the ROCE Trend For Cameco Tell Us?

We are a bit worried about the trend of returns on capital at Cameco. To be more specific, the ROCE was 5.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cameco becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Cameco is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 34% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Cameco, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Cameco 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.