May 19, 2022

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Ceragon Networks (NASDAQ:CRNT) May Have Issues Allocating Its Capital

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Ceragon Networks (NASDAQ:CRNT), we don’t think it’s current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Ceragon Networks:

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

0.0016 = US$296k ÷ (US$291m – US$103m) (Based on the trailing twelve months to March 2021).

So, Ceragon Networks has an ROCE of 0.2%. Ultimately, that’s a low return and it under-performs the Communications industry average of 7.9%.

Check out our latest analysis for Ceragon Networks

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In the above chart we have measured Ceragon Networks’ prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Ceragon Networks’ ROCE Trend?

When we looked at the ROCE trend at Ceragon Networks, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 14% five years ago. However it looks like Ceragon Networks might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Ceragon Networks has done well to pay down its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Ceragon Networks’ ROCE

Bringing it all together, while we’re somewhat encouraged by Ceragon Networks’ reinvestment in its own business, we’re aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 115% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.

On a separate note, we’ve found 2 warning signs for Ceragon Networks you’ll probably want to know about.

While Ceragon Networks may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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