Investors Could Be Concerned With Coforge's (NSE:COFORGE) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Coforge (NSE:COFORGE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Coforge:

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

0.13 = ₹13b ÷ (₹125b - ₹28b) (Based on the trailing twelve months to March 2025).

Thus, Coforge has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the IT industry.

See our latest analysis for Coforge

Above you can see how the current ROCE for Coforge 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 Coforge for free.

So How Is Coforge's ROCE Trending?

We weren't thrilled with the trend because Coforge's ROCE has reduced by 36% over the last five years, while the business employed 267% more capital. Usually this isn't ideal, but given Coforge conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Coforge's earnings and if they change as a result from the capital raise.

In Conclusion...

While returns have fallen for Coforge in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 599% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Coforge, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Coforge 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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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.