CPS Technologies (NASDAQ:CPSH) Shareholders Will Want The ROCE Trajectory To Continue
There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, CPS Technologies (NASDAQ:CPSH) looks quite promising in regards to its trends of return on capital.
What Is 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. The formula for this calculation on CPS Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$2.5m ÷ (US$21m - US$4.8m) (Based on the trailing twelve months to October 2022).
So, CPS Technologies has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 13% it's much better.
View our latest analysis for CPS Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for CPS Technologies' ROCE against it's prior returns. If you're interested in investigating CPS Technologies' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that CPS Technologies is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 16% on its capital. Not only that, but the company is utilizing 58% 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.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 23% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
In Conclusion...
To the delight of most shareholders, CPS Technologies has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 39% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Like most companies, CPS Technologies does come with some risks, and we've found 2 warning signs that you should be aware of.
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.
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