In This Article:
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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, the ROCE of Caldwell Partners International (TSE:CWL) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
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 Caldwell Partners International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CA$2.7m ÷ (CA$42m - CA$18m) (Based on the trailing twelve months to May 2020).
Therefore, Caldwell Partners International has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 8.0% it's much better.
View our latest analysis for Caldwell Partners International
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'd like to look at how Caldwell Partners International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Caldwell Partners International's ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 44% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Another thing to note, Caldwell Partners International has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
To sum it up, Caldwell Partners International has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 26%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.