What are the early trends to look for to identify a stock that could multiply in value over the long term? First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we briefly examined eClerx Services (NSE: ELERX) ROCE trend, we were very pleased with what we saw.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on the eClerx Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.32 = ₹5.6b ÷ (₹21b – ₹3.0b) (Based on the last twelve months to March 2022).
Thereby, eClerx Services posts a ROCE of 32%. In absolute terms, this is an excellent return and is even better than the IT industry average of 10.0%.
Check out our latest analysis for eClerx services
Above, you can see how the current ROCE of eClerx services compares to its past returns on capital, but there is little you can say about the past. If you want to see what analysts predict for the future, you should check out our free report for eClerx services.
What does the ROCE trend tell us for eClerx services?
eClerx Services is to be commended when it comes to their feedback. Over the past five years, ROCE has remained relatively stable at around 32% and the company has deployed 40% more capital into its operations. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Our perspective on the ROCE of eClerx services
In summary, we are pleased to see that eClerx Services has accrued returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And since the stock has risen sharply over the past five years, it looks like the market might be expecting that trend to continue. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimate on our platform definitely worth checking out.
If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
Valuation is complex, but we help make it simple.
Find out if eClerx Services is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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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.