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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Cognizant Technology Solutions (NASDAQ:CTSH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Cognizant Technology Solutions:

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

0.19 = US$2.9b ÷ (US$18b - US$3.3b) (Based on the trailing twelve months to December 2023).

So, Cognizant Technology Solutions has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the IT industry.

Check out 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 for free.

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Cognizant Technology Solutions' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Cognizant Technology Solutions to be a multi-bagger going forward.

In Conclusion...

In a nutshell, Cognizant Technology Solutions has been trudging along with the same returns from the same amount of capital over the last five years. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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

While Cognizant Technology Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.