Returns Are Gaining Momentum At Certara (NASDAQ:CERT)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Certara's (NASDAQ:CERT) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Certara is:

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

0.028 = US$40m ÷ (US$1.5b - US$105m) (Based on the trailing twelve months to September 2023).

Therefore, Certara has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 5.0%.

View our latest analysis for Certara

Above you can see how the current ROCE for Certara 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 Certara here for free.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 2.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 45% more capital is being employed now too. So we're very much inspired by what we're seeing at Certara thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that Certara is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 49% over the last three years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.