Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don’t think Cognizant Technology Solutions (NASDAQ:CTSH) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
What Is 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. To calculate this metric for Cognizant Technology Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = US$2.9b ÷ (US$18b – US$3.0b) (Based on the trailing twelve months to March 2024).
Therefore, Cognizant Technology Solutions has an ROCE of 19%. On its own, that’s a standard return, however it’s much better than the 11% generated by the IT industry.
Check out our latest analysis for Cognizant Technology Solutions
In the above chart we have measured Cognizant Technology Solutions’ 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 analyst report for Cognizant Technology Solutions .
So How Is Cognizant Technology Solutions’ ROCE Trending?
Over the past five years, Cognizant Technology Solutions’ ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So don’t be surprised if Cognizant Technology Solutions doesn’t end up being a multi-bagger in a few years time.
The Key Takeaway
In summary, Cognizant Technology Solutions isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 26% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you’re hunting for a multi-bagger, we think you’d have more luck elsewhere.
One more thing, we’ve spotted 1 warning sign facing Cognizant Technology Solutions that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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