Yahoo Finance Returns On Capital Signal Tricky Times Ahead For Cable One (NYSE:CABO)
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Cable One (NYSE:CABO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Cable One, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = US$523m ÷ (US$6.9b - US$269m) (Based on the trailing twelve months to September 2022).
So, Cable One has an ROCE of 7.8%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.
See our latest analysis for Cable One
Above you can see how the current ROCE for Cable One compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cable One here for free.
How Are Returns Trending?
When we looked at the ROCE trend at Cable One, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.8% from 11% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Cable One's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Cable One is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 6.3% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Cable One (of which 2 are a bit unpleasant!) that you should know about.
While Cable One isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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