What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Cognizant Technology Solutions’ (NASDAQ:CTSH) trend of ROCE, we liked what we saw.
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. The formula for this calculation on Cognizant Technology Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = US$3.0b ÷ (US$19b – US$2.9b) (Based on the trailing twelve months to June 2024).
Thus, Cognizant Technology Solutions has an ROCE of 19%. In absolute terms, that’s a satisfactory return, but compared to the IT industry average of 11% it’s much better.
Check out our latest analysis for Cognizant Technology Solutions
Above you can see how the current ROCE for Cognizant Technology Solutions compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Cognizant Technology Solutions .
What Can We Tell From Cognizant Technology Solutions’ ROCE Trend?
The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 19%. 19% is a pretty standard return, and it provides some comfort knowing that Cognizant Technology Solutions has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
The main thing to remember is that Cognizant Technology Solutions has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. So to determine if Cognizant Technology Solutions is a multi-bagger going forward, we’d suggest digging deeper into the company’s other fundamentals.
Like most companies, Cognizant Technology Solutions does come with some risks, and we’ve found 1 warning sign that you should be aware of.
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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