Capital Investments At Cognizant Technology Solutions (NASDAQ:CTSH) Point To A Promising Future

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Ergo, when we looked at the ROCE trends at Cognizant Technology Solutions (NASDAQ:CTSH), we liked what we saw.

What is 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 Cognizant Technology Solutions, this is the formula:

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

0.20 = US$2.9b ÷ (US$17b - US$3.2b) (Based on the trailing twelve months to March 2022).

Thus, Cognizant Technology Solutions has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Cognizant Technology Solutions

Above you can see how the current ROCE for Cognizant Technology Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cognizant Technology Solutions.

What Does the ROCE Trend For Cognizant Technology Solutions Tell Us?

We'd be pretty happy with returns on capital like Cognizant Technology Solutions. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 29% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Cognizant Technology Solutions can keep this up, we'd be very optimistic about its future.

Our Take On Cognizant Technology Solutions' ROCE

Cognizant Technology Solutions has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 3.4% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One more thing to note, we've identified 3 warning signs with Cognizant Technology Solutions and understanding them should be part of your investment process.

Cognizant Technology Solutions is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.