We Like These Underlying Return On Capital Trends At Cyanotech (NASDAQ:CYAN)
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, we've noticed some promising trends at Cyanotech (NASDAQ:CYAN) so let's look a bit deeper.
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. To calculate this metric for Cyanotech, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$2.3m ÷ (US$31m - US$4.7m) (Based on the trailing twelve months to December 2021).
Therefore, Cyanotech has an ROCE of 8.6%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 21%.
See our latest analysis for Cyanotech
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Cyanotech, check out these free graphs here.
What Can We Tell From Cyanotech's ROCE Trend?
Shareholders will be relieved that Cyanotech has broken into profitability. The company now earns 8.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Cyanotech has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In Conclusion...
To bring it all together, Cyanotech has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 27% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Cyanotech does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
