Here's What To Make Of Coda Octopus Group's (NASDAQ:CODA) Decelerating Rates Of Return
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Coda Octopus Group (NASDAQ:CODA), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Coda Octopus Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$4.2m ÷ (US$52m - US$2.0m) (Based on the trailing twelve months to July 2023).
So, Coda Octopus Group has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 13%.
See our latest analysis for Coda Octopus Group
Above you can see how the current ROCE for Coda Octopus Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Coda Octopus Group.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Coda Octopus Group. The company has employed 120% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Coda Octopus Group's ROCE
In summary, Coda Octopus Group has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Coda Octopus Group, we've discovered 3 warning signs that you should be aware of.
While Coda Octopus Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
