We Like These Underlying Return On Capital Trends At Charles & Colvard (NASDAQ:CTHR)

Simply Wall St
·2 min read

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Charles & Colvard (NASDAQ:CTHR) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Charles & Colvard:

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

0.066 = US$4.1m ÷ (US$68m - US$6.0m) (Based on the trailing twelve months to March 2022).

So, Charles & Colvard has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Luxury industry average of 15%.

See our latest analysis for Charles & Colvard

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Above you can see how the current ROCE for Charles & Colvard compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Charles & Colvard here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Charles & Colvard is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.6% which is a sight for sore eyes. Not only that, but the company is utilizing 77% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Charles & Colvard's ROCE

Overall, Charles & Colvard gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Charles & Colvard we've found 5 warning signs (2 are concerning!) that you should be aware of before investing here.

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.