Investors Met With Slowing Returns on Capital At Cognizant Technology Solutions (NASDAQ:CTSH)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Cognizant Technology Solutions (NASDAQ:CTSH), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Cognizant Technology Solutions is:

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

0.21 = US$3.0b ÷ (US$17b - US$3.2b) (Based on the trailing twelve months to September 2022).

So, Cognizant Technology Solutions has an ROCE of 21%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

View 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, you can check out the forecasts from the analysts covering Cognizant Technology Solutions here for free.

How Are Returns Trending?

Over the past five years, Cognizant Technology Solutions' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.

What We Can Learn From Cognizant Technology Solutions' ROCE

While Cognizant Technology Solutions has impressive profitability from its capital, it isn't increasing that amount of capital. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Cognizant Technology Solutions has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Cognizant Technology Solutions that you might find interesting.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.