If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of CLPS Incorporation (NASDAQ:CLPS) looks decent, right now, so lets see what the trend of returns can tell us.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.14 = US$8.4m ÷ (US$83m - US$23m) (Based on the trailing twelve months to June 2021).
Thus, CLPS Incorporation has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for CLPS Incorporation's ROCE against it's prior returns. 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?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 1,318% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that CLPS Incorporation has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 28% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
What We Can Learn From CLPS Incorporation's ROCE
The main thing to remember is that CLPS Incorporation has proven its ability to continually reinvest at respectable rates of return. Yet over the last three years the stock has declined 64%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
One final note, you should learn about the 4 warning signs we've spotted with CLPS Incorporation (including 1 which shouldn't be ignored) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Valuation is complex, but we're helping make it simple.
Find out whether CLPS Incorporation is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
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.
Adequate balance sheet and slightly overvalued.