Returns On Capital Signal Tricky Times Ahead For Cobram Estate Olives (ASX:CBO)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Cobram Estate Olives (ASX:CBO), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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. The formula for this calculation on Cobram Estate Olives is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0042 = AU$2.1m ÷ (AU$569m - AU$60m) (Based on the trailing twelve months to December 2022).
Therefore, Cobram Estate Olives has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 2.9%.
See our latest analysis for Cobram Estate Olives
Above you can see how the current ROCE for Cobram Estate Olives 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 Cobram Estate Olives.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Cobram Estate Olives doesn't inspire confidence. Around five years ago the returns on capital were 2.5%, but since then they've fallen to 0.4%. However it looks like Cobram Estate Olives 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.
The Bottom Line
In summary, Cobram Estate Olives is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 21% in the last year. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a separate note, we've found 1 warning sign for Cobram Estate Olives you'll probably want to know about.
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.
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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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