Yahoo Finance Can ChannelAdvisor (NYSE:ECOM) Continue To Grow Its Returns On Capital?
What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at ChannelAdvisor (NYSE:ECOM) and its trend of ROCE, we really liked what we saw.
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 ChannelAdvisor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$19m ÷ (US$181m - US$43m) (Based on the trailing twelve months to December 2020).
Therefore, ChannelAdvisor has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Software industry.
View our latest analysis for ChannelAdvisor
Above you can see how the current ROCE for ChannelAdvisor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ChannelAdvisor.
The Trend Of ROCE
We're delighted to see that ChannelAdvisor is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 14% on its capital. Not only that, but the company is utilizing 46% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
To the delight of most shareholders, ChannelAdvisor has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we've found 3 warning signs for ChannelAdvisor that we think you should be aware of.
While ChannelAdvisor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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