Ceapro's (CVE:CZO) Returns On Capital Not Reflecting Well On The Business

Simply Wall St
·3 min read

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Ceapro (CVE:CZO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Ceapro is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.068 = CA$2.0m ÷ (CA$31m - CA$1.5m) (Based on the trailing twelve months to September 2021).

Therefore, Ceapro has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 11%.

See our latest analysis for Ceapro

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Ceapro's ROCE against it's prior returns. If you'd like to look at how Ceapro has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Ceapro's ROCE Trending?

When we looked at the ROCE trend at Ceapro, we didn't gain much confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 6.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Ceapro's ROCE

Bringing it all together, while we're somewhat encouraged by Ceapro's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 71% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a final note, we found 4 warning signs for Ceapro (1 is a bit unpleasant) you should be aware of.

While Ceapro 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.