Charles & Colvard (NASDAQ:CTHR) Is Doing The Right Things To Multiply Its Share Price
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Charles & Colvard's (NASDAQ:CTHR) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Charles & Colvard is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = US$5.9m ÷ (US$67m - US$6.1m) (Based on the trailing twelve months to September 2021).
Thus, Charles & Colvard has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 14%.
View our latest analysis for Charles & Colvard
Above you can see how the current ROCE for Charles & Colvard compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Charles & Colvard here for free.
How Are Returns Trending?
Charles & Colvard has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 9.7% which is a sight for sore eyes. Not only that, but the company is utilizing 64% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
To the delight of most shareholders, Charles & Colvard has now broken into profitability. Since the stock has returned a staggering 165% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Charles & Colvard does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
