Returns On Capital Are Showing Encouraging Signs At Coda Octopus Group (NASDAQ:CODA)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Coda Octopus Group's (NASDAQ:CODA) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. 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)
0.11 = US$5.0m ÷ (US$51m - US$3.8m) (Based on the trailing twelve months to January 2023).
So, Coda Octopus Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electronic industry average of 13%.
See our latest analysis for Coda Octopus Group
In the above chart we have measured Coda Octopus Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Coda Octopus Group here for free.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Coda Octopus Group. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 93%. So we're very much inspired by what we're seeing at Coda Octopus Group thanks to its ability to profitably reinvest capital.
Our Take On Coda Octopus Group's ROCE
In summary, it's great to see that Coda Octopus Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Coda Octopus Group can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with Coda Octopus Group and understanding it should be part of your investment process.
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.
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