Capital returns signal tricky times ahead for Cobram Estate olives (ASX:CBO)

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. In light of this, when we looked Cobram Estate Olives (ASX:CBO) and its ROCE trend, we weren’t exactly thrilled.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Cobram Estate Olives, here is the formula:

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

0.013 = AU$6.5 million ÷ (AUD$551 million – AU$39 million) (Based on the last twelve months to June 2022).

Thereby, Cobram Estate Olives has a ROCE of 1.3%. Ultimately, it’s a poor performer and it underperforms the food industry average by 5.0%.

Check out our latest analysis for Cobram Estate Olives


Above, you can see how Cobram Estate Olives’ current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you wish, you can view analyst forecasts covering Cobram Estate Olives here for free.

The ROCE trend

On the surface, the ROCE trend at Cobram Estate Olives does not inspire confidence. About five years ago, the return on capital was 8.8%, but since then it has fallen to 1.3%. However, it looks like Cobram Estate Olives could reinvest for long-term growth because while capital employed has increased, the company’s sales have not changed much over the past 12 months. It may take some time before the company begins to see a change in the income from these investments.

Our take on the ROCE of Cobram Estate Olives

In summary, while we are somewhat encouraged by Cobram Estate Olives reinvesting in its own business, we are aware that returns are diminishing. And over the past year, the stock has fallen 21%, so the market doesn’t seem too optimistic that these trends will strengthen anytime soon. Overall, the inherent tendencies aren’t typical of multi-baggers, so if that’s what you’re looking for, we think you might have better luck elsewhere.

Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for Cobram Estate Olives (including 1 not to be overlooked!) that you should know.

Although Cobram Estate Olives does not generate 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.

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