We Like These Underlying Return On Capital Trends At ExlService Holdings (NASDAQ:EXLS)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at ExlService Holdings (NASDAQ:EXLS) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ExlService Holdings is:

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

0.18 = US$191m ÷ (US$1.3b - US$278m) (Based on the trailing twelve months to December 2022).

Therefore, ExlService Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 12% it's much better.

Check out our latest analysis for ExlService Holdings

In the above chart we have measured ExlService Holdings' 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 report on analyst forecasts for the company.

SWOT Analysis for ExlService Holdings

The Trend Of ROCE

We like the trends that we're seeing from ExlService Holdings. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. The amount of capital employed has increased too, by 57%. So we're very much inspired by what we're seeing at ExlService Holdings thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that ExlService Holdings 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if ExlService Holdings can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for ExlService Holdings that we think you should be aware of.

While ExlService Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.