Yahoo Finance Cake Box Holdings (LON:CBOX) Is Reinvesting At Lower Rates Of Return
There are a few key trends to look for if we want to identify the next multi-bagger. 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. So when we looked at Cake Box Holdings (LON:CBOX), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Understanding 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. The formula for this calculation on Cake Box Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = UK£5.4m ÷ (UK£25m - UK£4.4m) (Based on the trailing twelve months to September 2022).
Thus, Cake Box Holdings has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 10%.
View our latest analysis for Cake Box Holdings
In the above chart we have measured Cake Box Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Cake Box Holdings here for free.
What Does the ROCE Trend For Cake Box Holdings Tell Us?
On the surface, the trend of ROCE at Cake Box Holdings doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 51%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Cake Box Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 17% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we've found 3 warning signs for Cake Box Holdings that we think you should be aware of.
Cake Box Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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