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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Cohort's (LON:CHRT) returns on capital, so let's have a look.
What Is 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. Analysts use this formula to calculate it for Cohort:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£14m ÷ (UK£194m - UK£58m) (Based on the trailing twelve months to October 2022).
Therefore, Cohort has an ROCE of 10.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 10%.
See our latest analysis for Cohort
In the above chart we have measured Cohort's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cohort.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 10.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 78% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Cohort's ROCE
All in all, it's terrific to see that Cohort is reaping the rewards from prior investments and is growing its capital base. And with a respectable 51% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a separate note, we've found 1 warning sign for Cohort you'll probably want to know about.
While Cohort isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.