To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of CGI (TSE:GIB.A) looks attractive 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. To calculate this metric for CGI, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$2.4b ÷ (CA$16b - CA$4.0b) (Based on the trailing twelve months to March 2024).
So, CGI has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 11%.
See our latest analysis for CGI
In the above chart we have measured CGI's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for CGI .
How Are Returns Trending?
In terms of CGI's history of ROCE, it's quite impressive. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 22% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If CGI can keep this up, we'd be very optimistic about its future.
Our Take On CGI's ROCE
In short, we'd argue CGI has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 35% over the last five years for shareholders who have owned the stock in this period. So to determine if CGI is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
While CGI looks impressive, no company is worth an infinite price. The intrinsic value infographic for GIB.A helps visualize whether it is currently trading for a fair price.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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About TSX:GIB.A
Flawless balance sheet with proven track record.
