Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at Amdocs' (NASDAQ:DOX) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Amdocs is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$745m ÷ (US$6.4b - US$1.4b) (Based on the trailing twelve months to June 2024).
Thus, Amdocs has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 11% it's much better.
View 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, you can check out the forecasts from the analysts covering Amdocs for free.
What Can We Tell From Amdocs' ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 23% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Amdocs has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Amdocs' ROCE
In the end, Amdocs has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 45% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Amdocs could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for DOX on our platform quite valuable.
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NasdaqGS:DOX
Amdocs
Through its subsidiaries, provides software and services to communications, entertainment, and media service providers worldwide.
Undervalued with excellent balance sheet and pays a dividend.
