Advertisement

Should You Be Impressed By Chase's (NYSEMKT:CCF) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Chase (NYSEMKT:CCF), we don't think it's current trends fit the mold of a multi-bagger.

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 Chase:

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

0.15 = US$47m ÷ (US$334m - US$23m) (Based on the trailing twelve months to May 2020).

Therefore, Chase has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Chemicals industry.

See our latest analysis for Chase

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chase's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Chase, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Chase, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Chase is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park delivering a 166% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for Chase 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.