Cooper Tire & Rubber (NYSE:CTB) Will Be Looking To Turn Around Its Returns
When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Cooper Tire & Rubber (NYSE:CTB) we aren't filled with optimism, but let's investigate further.
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 Cooper Tire & Rubber:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = US$214m ÷ (US$3.0b - US$648m) (Based on the trailing twelve months to December 2020).
Thus, Cooper Tire & Rubber has an ROCE of 9.2%. On its own, that's a low figure but it's around the 10% average generated by the Auto Components industry.
Check out our latest analysis for Cooper Tire & Rubber
In the above chart we have measured Cooper Tire & Rubber's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Cooper Tire & Rubber's ROCE Trend?
We are a bit worried about the trend of returns on capital at Cooper Tire & Rubber. About five years ago, returns on capital were 22%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Cooper Tire & Rubber becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that Cooper Tire & Rubber is generating lower returns from the same amount of capital. However the stock has delivered a 82% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
One more thing, we've spotted 1 warning sign facing Cooper Tire & Rubber that you might find interesting.
While Cooper Tire & Rubber isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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