Yahoo Finance Investors Should Be Encouraged By Cabot's (NYSE:CBT) Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Cabot's (NYSE:CBT) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Cabot, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$542m ÷ (US$3.5b - US$984m) (Based on the trailing twelve months to December 2022).
So, Cabot has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 11%.
View our latest analysis for Cabot
In the above chart we have measured Cabot's 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 Cabot here for free.
The Trend Of ROCE
Cabot is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 41% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Key Takeaway
To bring it all together, Cabot has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 34% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One more thing: We've identified 3 warning signs with Cabot (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
Cabot 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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