Cerence (NASDAQ:CRNC) Hasn't Managed To Accelerate Its Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Cerence (NASDAQ:CRNC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.042 = US$64m ÷ (US$1.7b - US$156m) (Based on the trailing twelve months to March 2022).

So, Cerence has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.9%.

View our latest analysis for Cerence

Above you can see how the current ROCE for Cerence compares to its prior returns on capital, but there's only so much you can tell from the past. 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

The returns on capital haven't changed much for Cerence in recent years. The company has employed 23% more capital in the last four years, and the returns on that capital have remained stable at 4.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Cerence's ROCE

Long story short, while Cerence has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 76% over the last year. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Cerence, we've discovered 3 warning signs that you should be aware of.

While Cerence 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. 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.