Amdocs' (NASDAQ:DOX) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Amdocs (NASDAQ:DOX) looks decent, right now, so lets see what the trend of returns can tell us.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Amdocs, this is the formula:

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

0.12 = US$618m ÷ (US$6.5b - US$1.3b) (Based on the trailing twelve months to September 2021).

Therefore, Amdocs has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 13%.

See our latest analysis for Amdocs

Above you can see how the current ROCE for Amdocs 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 Amdocs.

What Does the ROCE Trend For Amdocs Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 31% more capital into its operations. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

To sum it up, Amdocs has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 40% over the last five years for shareholders who have owned the stock in this 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.

On a final note, we found 3 warning signs for Amdocs (1 is potentially serious) you should be aware of.

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

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.

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