There are a few key trends to look out for if we want to identify the next multi-bagger. In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. With this in mind, the ROCE of Cognizant technology solutions (NASDAQ:CTSH) looks attractive right now, so let’s see what the trend in returns can tell us.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Cognizant Technology Solutions is as follows:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = $3.0 billion ÷ ($17 billion – $3.2 billion) (Based on the last twelve months to June 2022).
Therefore, Cognizant Technology Solutions has a ROCE of 21%. This is a fantastic return and not only that, it exceeds the 13% average earned by companies in a similar industry.
Our analysis indicates that The CTSH is potentially undervalued!
In the chart above, we’ve measured Cognizant Technology Solutions’ past ROCE against its past performance, but the future is arguably more important. If you’d like, you can view analyst forecasts covering Cognizant’s technology solutions here for free.
What can we say about the ROCE trend of Cognizant Technology Solutions?
It’s hard not to be impressed with the returns on investment from Cognizant Technology Solutions. The company has employed 22% more capital over the past five years, and the return on that capital has remained stable at 21%. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Cognizant Technology Solutions ROCE Basics
In summary, we are pleased to see that Cognizant Technology Solutions has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. However, despite favorable fundamentals, the stock has fallen 17% in the past five years, so there could be an opportunity here for shrewd investors. Therefore we think it would be worth taking this stock further given that the fundamentals are attractive.
On a separate note, we found 1 warning sign for Cognizant technology solutions you will probably want to know more.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
Valuation is complex, but we help make it simple.
Find out if Cognizant technology solutions is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.