Caesarstone (NASDAQ:CSTE) may have problems allocating its capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. That said, at a first glance at Caesarstone (NASDAQ: CSTE) we’re not jumping out of our chairs on the yield trend, but taking a closer look.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on Caesarstone is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.038 = $26 million ÷ ($862 million – $170 million) (Based on the last twelve months to March 2022).
Thereby, Caesarstone has a ROCE of 3.8%. Ultimately, it’s a poor performer and it underperforms the building industry average by 14%.
In the chart above, we measured Caesarstone’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So what is Caesarstone’s ROCE trend?
When we looked at the ROCE trend at Caesarstone, we didn’t gain much confidence. About five years ago, the return on capital was 20%, but since then it has fallen to 3.8%. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.
While yields have fallen for Caesarstone lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. Despite these promising trends, the stock has crashed 75% in the past five years, so there could be other factors hurting the company’s prospects. Either way, reinvesting can pay off in the long run, so we think savvy investors may want to dig into this stock.
One more thing we spotted 2 warning signs facing Caesarstone that you might find interesting.
Although Caesarstone doesn’t get the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.