If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Co-Diagnostics' (NASDAQ:CODX) look very promising so lets take a look.
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 Co-Diagnostics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$8.0m ÷ (US$36m - US$3.0m) (Based on the trailing twelve months to June 2020).
Thus, Co-Diagnostics has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 9.0%.
In the above chart we have measured Co-Diagnostics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Co-Diagnostics.
What The Trend Of ROCE Can Tell Us
The fact that Co-Diagnostics is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 24% on its capital. In addition to that, Co-Diagnostics is employing 1,907% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line On Co-Diagnostics' ROCE
Long story short, we're delighted to see that Co-Diagnostics' reinvestment activities have paid off and the company is now profitable. And a remarkable 128% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 3 warning signs for Co-Diagnostics (2 are a bit unpleasant) you should be aware of.
Co-Diagnostics is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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.
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