Returns On Capital At Cognex (NASDAQ:CGNX) Have Stalled
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Cognex's (NASDAQ:CGNX) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Cognex is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$206m ÷ (US$1.8b - US$132m) (Based on the trailing twelve months to December 2020).
Thus, Cognex has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Electronic industry.
Check out our latest analysis for Cognex
In the above chart we have measured Cognex's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cognex.
What The Trend Of ROCE Can Tell Us
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 100% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Cognex 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.
The Bottom Line On Cognex's ROCE
The main thing to remember is that Cognex has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 315% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On a final note, we've found 1 warning sign for Cognex that we think you should be aware of.
While Cognex 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.
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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