Stock Analysis

Returns On Capital At CLPS Incorporation (NASDAQ:CLPS) Paint An Interesting Picture

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NasdaqGM:CLPS
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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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at CLPS Incorporation (NASDAQ:CLPS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 CLPS Incorporation:

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

0.044 = US$1.3m ÷ (US$45m - US$16m) (Based on the trailing twelve months to June 2020).

So, CLPS Incorporation has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.8%.

Check out our latest analysis for CLPS Incorporation

roce
NasdaqGM:CLPS Return on Capital Employed December 15th 2020

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating CLPS Incorporation's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From CLPS Incorporation's ROCE Trend?

On the surface, the trend of ROCE at CLPS Incorporation doesn't inspire confidence. Over the last four years, returns on capital have decreased to 4.4% from 15% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, CLPS Incorporation has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CLPS Incorporation. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with CLPS Incorporation (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While CLPS Incorporation 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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What are the risks and opportunities for CLPS Incorporation?

CLPS Incorporation provides information technology (IT), consulting, and solutions to institutions operating in banking, insurance, and financial sectors in the People’s Republic of China and internationally.

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Rewards

  • Price-To-Earnings ratio (7.7x) is below the US market (15.1x)

Risks

  • High level of non-cash earnings

  • Does not have a meaningful market cap ($34M)

  • Shareholders have been diluted in the past year

  • Profit margins (2.9%) are lower than last year (5.4%)

  • Volatile share price over the past 3 months

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CLPS Incorporation

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