What Do The Returns On Capital At CECO Environmental (NASDAQ:CECE) Tell Us?
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at CECO Environmental (NASDAQ:CECE) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for CECO Environmental, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$22m ÷ (US$422m - US$110m) (Based on the trailing twelve months to September 2020).
So, CECO Environmental has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.
See our latest analysis for CECO Environmental
Above you can see how the current ROCE for CECO Environmental 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 CECO Environmental.
How Are Returns Trending?
We're a bit concerned with the trends, because the business is applying 37% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
Our Take On CECO Environmental's ROCE
Overall, we're not ecstatic to see CECO Environmental reducing the amount of capital it employs in the business. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you want to continue researching CECO Environmental, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
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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