Conduent (NASDAQ:CNDT) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Conduent's (NASDAQ:CNDT) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Conduent, this is the formula:

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

0.051 = US$151m ÷ (US$3.9b - US$933m) (Based on the trailing twelve months to September 2022).

Therefore, Conduent has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

See our latest analysis for Conduent

In the above chart we have measured Conduent's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Conduent here for free.

What Does the ROCE Trend For Conduent Tell Us?

Like most people, we're pleased that Conduent is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 5.1% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 53%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line On Conduent's ROCE

From what we've seen above, Conduent has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 72% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we found 2 warning signs for Conduent (1 is a bit concerning) you should be aware of.

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.

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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.