When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Corum Group (ASX:COO), we weren't too upbeat about how things were going.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Corum Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = AU$685k ÷ (AU$19m - AU$5.5m) (Based on the trailing twelve months to June 2020).
Therefore, Corum Group has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 14%.
View our latest analysis for Corum Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Corum Group's ROCE against it's prior returns. If you're interested in investigating Corum Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Corum Group Tell Us?
We aren't too thrilled by the trend because ROCE has declined 66% over the last five years and despite the capital raising conducted before the latest reports, the business has -32% less capital employed.
The Bottom Line On Corum Group's ROCE
To see Corum Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. It should come as no surprise then that the stock has fallen 60% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Corum Group (of which 3 make us uncomfortable!) that you should know about.
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.
This article by Simply Wall St is general in nature. 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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