Yahoo Finance Here's What's Concerning About CF Energy's (CVE:CFY) 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? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating CF Energy (CVE:CFY), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for CF Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CN¥40m ÷ (CN¥1.3b - CN¥431m) (Based on the trailing twelve months to December 2023).
Therefore, CF Energy has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Gas Utilities industry average of 5.9%.
See our latest analysis for CF Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for CF Energy's ROCE against it's prior returns. If you'd like to look at how CF Energy has performed in the past in other metrics, you can view this free graph of CF Energy's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of CF Energy's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
While returns have fallen for CF Energy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 66% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to know some of the risks facing CF Energy we've found 5 warning signs (3 don't sit too well with us!) that you should be aware of before investing here.
While CF Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
