Investors Will Want Conduent's (NASDAQ:CNDT) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Conduent (NASDAQ:CNDT) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for Conduent, this is the formula:

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

0.019 = US$60m ÷ (US$4.2b - US$1.0b) (Based on the trailing twelve months to March 2021).

So, Conduent has an ROCE of 1.9%. 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.9% on their capital employed. Additionally, the business is utilizing 52% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Conduent could be selling under-performing assets since the ROCE is improving.

Our Take On Conduent's ROCE

In summary, it's great to see that Conduent has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 68% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Conduent you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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