Can Computershare (ASX:CPU) Continue To Grow Its Returns On Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Computershare (ASX:CPU) and its trend of ROCE, we really liked what we saw.

Understanding 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 Computershare:

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

0.11 = US$450m ÷ (US$4.9b - US$835m) (Based on the trailing twelve months to December 2019).

Thus, Computershare has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for Computershare

In the above chart we have a measured Computershare's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Computershare here for free.

What Can We Tell From Computershare's ROCE Trend?

The trends we've noticed at Computershare are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 42%. So we're very much inspired by what we're seeing at Computershare thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Computershare can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 28% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 2 warning signs for Computershare you'll probably want to know about.

While Computershare isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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