Nasdaq Today – Will Cognizant Technology Solutions (NASDAQ:CTSH) Multiply In Value Going Forward?
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Cognizant Technology Solutions (NASDAQ:CTSH) looks decent, right now, so lets see what the trend of returns can tell us.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.18 = US$2.4b ÷ (US$17b – US$3.5b) (Based on the trailing twelve months to December 2020).
So, Cognizant Technology Solutions has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the IT industry average of 10% it’s much better.
View 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, you can check out the forecasts from the analysts covering Cognizant Technology Solutions here for free.
What Does the ROCE Trend For Cognizant Technology Solutions Tell Us?
While the returns on capital are good, they haven’t moved much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 29% in that time. Since 18% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. 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.
In the end, Cognizant Technology Solutions has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 37% 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.
If you’re still interested in Cognizant Technology Solutions it’s worth checking out our FREE intrinsic value approximation to see if it’s trading at an attractive price in other respects.
While Cognizant Technology Solutions isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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