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Identifying Stocks with Long-Term Value
When looking for stocks that can multiply in value over the long term, it is important to consider certain trends. One such trend is a growing return on capital employed (ROCE) accompanied by an expanding capital base. This indicates that the company is capable of reinvesting its earnings back into the business and generating higher returns. However, when we analyzed Cognizant Technology Solutions (NASDAQ: CTSH), although they have a high ROCE, the trend of returns was not particularly impressive.
Understanding Return on Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for calculating ROCE for Cognizant Technology Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Based on the trailing twelve months to March 2023, Cognizant Technology Solutions has an ROCE of 20%. This is a fantastic return and exceeds the average of 14% earned by companies in a similar industry.
Assessing Cognizant Technology Solutions’ ROCE Trend
Over the past five years, there hasn’t been much change in Cognizant Technology Solutions’ returns or its level of capital employed. This suggests that the company has reached a mature stage with steady operations, but it may be difficult for it to experience significant growth unless capital employed increases. Therefore, while the current operations deliver respectable returns, it is uncertain if the stock can be a multi-bagger in the future.
Our Perspective on Cognizant Technology Solutions’ ROCE
Although Cognizant Technology Solutions demonstrates impressive profitability from its capital, it is not increasing the amount of capital. Additionally, the stock’s total return to shareholders over the last five years has been flat. Considering these underlying trends, we believe there may be better opportunities to find a multi-bagger elsewhere.
Researching Cognizant Technology Solutions
If you wish to continue researching Cognizant Technology Solutions, you may be interested to learn about the warning sign our analysis has discovered. Additionally, you can explore our free list of companies earning high returns on equity with solid fundamentals.
Valuation Analysis
Valuation can be complex, but our comprehensive analysis simplifies the process. It includes fair value estimates, risks and warnings, dividends, insider transactions, and financial health. For an in-depth analysis of Cognizant Technology Solutions’ valuation, click the link below.
Feedback and Disclaimer
If you have any feedback or concerns about this article, please get in touch with us directly or email our editorial team. Please note that this article by Simply Wall St is based on historical data and analyst forecasts. It should not be considered financial advice and does not take into account individual objectives or financial situations. Our aim is to provide unbiased analysis driven by fundamental data. We do not have a position in any of the stocks mentioned.
