Consensus Cloud Solutions (NASDAQ:CCSI) Is Very Good At Capital Allocation

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Consensus Cloud Solutions (NASDAQ:CCSI) looks great, so lets see what the trend can tell us.

What Is Return On Capital Employed (ROCE)?

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 Consensus Cloud Solutions is:

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

0.26 = US$147m ÷ (US$647m - US$71m) (Based on the trailing twelve months to December 2023).

Thus, Consensus Cloud Solutions has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Software industry average of 7.3%.

View our latest analysis for Consensus Cloud Solutions

In the above chart we have measured Consensus Cloud Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Consensus Cloud Solutions .

What Does the ROCE Trend For Consensus Cloud Solutions Tell Us?

Consensus Cloud Solutions has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 67% over the trailing four years. The company is now earning US$0.3 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 54% less than it was four years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Bottom Line On Consensus Cloud Solutions' ROCE

From what we've seen above, Consensus Cloud Solutions has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 53% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Consensus Cloud Solutions (of which 2 are a bit concerning!) that you should know about.

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.