Returns Are Gaining Momentum At Cobram Estate Olives (ASX:CBO)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Cobram Estate Olives' (ASX:CBO) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Cobram Estate Olives:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.038 = AU$21m ÷ (AU$610m - AU$60m) (Based on the trailing twelve months to June 2023).

So, Cobram Estate Olives has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Food industry average of 5.0%.

Check out our latest analysis for Cobram Estate Olives

roce

In the above chart we have measured Cobram Estate Olives' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We're delighted to see that Cobram Estate Olives 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 3.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Cobram Estate Olives is utilizing 100% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Cobram Estate Olives' ROCE

In summary, it's great to see that Cobram Estate Olives has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 21% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Cobram Estate Olives that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.