Investors Could Be Concerned With Canterbury Park Holding's (NASDAQ:CPHC) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Canterbury Park Holding (NASDAQ:CPHC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Canterbury Park Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = US$5.9m ÷ (US$101m - US$10m) (Based on the trailing twelve months to September 2023).
So, Canterbury Park Holding has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.5%.
View our latest analysis for Canterbury Park Holding
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Canterbury Park Holding has performed in the past in other metrics, you can view this free graph of Canterbury Park Holding's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Canterbury Park Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Canterbury Park Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Canterbury Park Holding's ROCE
To conclude, we've found that Canterbury Park Holding is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 52% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing to note, we've identified 2 warning signs with Canterbury Park Holding and understanding them should be part of your investment process.
While Canterbury Park Holding 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.
