Under The Bonnet, Cogstate's (ASX:CGS) Returns Look Impressive
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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Cogstate's (ASX:CGS) look very promising so lets take a look.
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 Cogstate is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$11m ÷ (US$58m - US$18m) (Based on the trailing twelve months to June 2022).
Therefore, Cogstate has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
View our latest analysis for Cogstate
Above you can see how the current ROCE for Cogstate 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 Cogstate.
How Are Returns Trending?
We're delighted to see that Cogstate is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 27% which is a sight for sore eyes. Not only that, but the company is utilizing 246% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Key Takeaway
Overall, Cogstate gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
While Cogstate looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CGS is currently trading for a fair price.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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.
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