There's Been No Shortage Of Growth Recently For CPS Technologies' (NASDAQ:CPSH) Returns On Capital
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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, CPS Technologies (NASDAQ:CPSH) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CPS Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$2.4m ÷ (US$21m - US$4.8m) (Based on the trailing twelve months to April 2023).
So, CPS Technologies has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Electronic industry.
Check out our latest analysis for CPS Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for CPS Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CPS Technologies, check out these free graphs here.
So How Is CPS Technologies' ROCE Trending?
The fact that CPS Technologies is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. Not only that, but the company is utilizing 89% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Key Takeaway
To the delight of most shareholders, CPS Technologies has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 86% return over the last five years. In light of that, we think it's worth looking further into this stock because if CPS Technologies can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing CPS Technologies that you might find interesting.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
