Returns On Capital At Cognizant Technology Solutions (NASDAQ:CTSH) Have Hit The Brakes

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Looking at Cognizant Technology Solutions (NASDAQ:CTSH), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Cognizant Technology Solutions:

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

0.20 = US$2.9b ÷ (US$18b – US$3.2b) (Based on the trailing twelve months to September 2023).

Thus, Cognizant Technology Solutions has an ROCE of 20%. In absolute terms that’s a great return and it’s even better than the IT industry average of 12%.

View our latest analysis for Cognizant Technology Solutions

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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’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

There hasn’t been much to report for Cognizant Technology Solutions’ returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. So it may not be a multi-bagger in the making, but given the decent 20% return on capital, it’d be difficult to find fault with the business’s current operations.

Our Take On Cognizant Technology Solutions’ ROCE

In summary, Cognizant Technology Solutions isn’t compounding its earnings but is generating decent returns on the same amount of capital employed. And with the stock having returned a mere 28% in the last five years to shareholders, you could argue that they’re aware of these lackluster trends. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.

If you’d like to know about the risks facing Cognizant Technology Solutions, we’ve discovered 1 warning sign that you should be aware of.

If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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