Investors Met With Slowing Returns on Capital At Cambium Networks (NASDAQ:CMBM)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Cambium Networks' (NASDAQ:CMBM) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Cambium Networks, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$28m ÷ (US$283m - US$94m) (Based on the trailing twelve months to March 2023).
Therefore, Cambium Networks has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 9.9% it's much better.
View our latest analysis for Cambium Networks
In the above chart we have measured Cambium Networks' 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.
So How Is Cambium Networks' ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 168% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Cambium Networks has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Cambium Networks has done well to reduce current liabilities to 33% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On Cambium Networks' ROCE
The main thing to remember is that Cambium Networks has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 20% over the last three years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One more thing: We've identified 2 warning signs with Cambium Networks (at least 1 which is significant) , and understanding them would certainly be useful.
While Cambium Networks may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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