Capital investment trends at Codan (ASX:CDA) appear solid

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. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. With this in mind, the ROCE of Codan (ASX:CDA) looks attractive right now, so let’s see what the yield trend can tell us.

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. To calculate this metric for Codan, here is the formula:

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

0.34 = AU$148 million ÷ (AU$547 million – AU$114 million) (Based on the last twelve months to December 2021).

Thereby, Codan has a ROCE of 34%. In absolute terms, this is excellent performance and even better than the electronics industry average of 10%.

Check out our latest analysis for Codan

ASX: CDA Return on Capital Employed June 28, 2022

In the chart above, we measured Codan’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Codan.

What is the return trend?

Codan deserves credit for his comebacks. The company has employed 153% more capital over the past five years, and the return on that capital has remained stable at 34%. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.

Our view on Codan’s ROCE

Codan has a proven track record of delivering high returns on increasing amounts of capital employed, which we are delighted about. On top of that, the stock has rewarded shareholders with a remarkable return of 259% for those who have held it over the past five years. So while the stock may be more “expensive” than it used to be, we believe the strong fundamentals warrant this stock for further research.

One last note, you should inquire about the 2 warning signs we spotted some with Codan (including 1 that should not be overlooked).

Codan is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.

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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