Conduent (NASDAQ:CNDT) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)

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 Conduent is:

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

0.0073 = US$23m ÷ (US$4.3b - US$1.1b) (Based on the trailing twelve months to December 2020).

Therefore, Conduent has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.

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 to see what analysts are forecasting going forward, you should check out our free report for Conduent.

What The Trend Of ROCE Can Tell Us

It's great to see that Conduent has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.7% which is no doubt a relief for some early shareholders. In regards to capital employed, Conduent is using 50% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Conduent could be selling under-performing assets since the ROCE is improving.

The Bottom Line On Conduent's ROCE

In a nutshell, we're pleased to see that Conduent has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 64% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Conduent does come with some risks, and we've found 2 warning signs that you should be aware of.

While Conduent 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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This article by Simply Wall St is general in nature. 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.
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