We love Cabot (NYSE: CBT) returns and here is their trend

To find multi-bagger stock, what are the underlying trends we need to look for in a business? First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Speaking of which, we have noticed some big changes in Pooch (NYSE: CBT) back on capital, so let’s take a look.

Understanding Return on Capital Employed (ROCE)

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. The formula for this calculation on Cabot is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.21 = $ 461 million ÷ ($ 3.3 billion – $ 1.1 billion) (Based on the last twelve months up to September 2021).

So, Cabot has a ROCE of 21%. This is a fantastic return and not only that, it exceeds the 11% average earned by companies in a similar industry.

NYSE: CBT Return on Capital Employed December 4, 2021

In the graph above, we’ve measured Cabot’s past ROCE versus past performance, but arguably the future is more important. If you want, you can check out the analysts’ forecasts covering Cabot here for free.

The ROCE trend

Cabot is promising given that his ROCE is trending up and to the right. Figures show that over the past five years, ROCE has increased by 91% while using roughly the same amount of capital. So our view is that the business has increased its efficiency to generate these higher returns, while not needing to make additional investments. On this front, things are looking good, so it’s worth exploring what management has said about growth plans for the future.

For the record, there was a noticeable increase in the company’s current liabilities over the period, so we attribute some of the ROCE growth to that. Current liabilities have increased to 35% of total assets, so the company is now more funded by its suppliers or short-term creditors. It’s worth keeping an eye on this, because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Cabot’s ROCE result

In summary, we are delighted to see that Cabot has been able to increase efficiency and achieve higher rates of return on the same amount of capital. Given that the stock has delivered 18% to its shareholders over the past five years, it may be fair to think that investors are not yet fully aware of the promising trends. With that in mind, we would dig deeper into this stock in case there are more traits that could cause it to multiply in the long term.

On a separate note we have found 1 warning sign for Cabot you will probably want to know more.

High yields are a key ingredient to strong performance, so check out our free list of stocks generating 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 using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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