Thoughtworks Holding (NASDAQ:TWKS) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Thoughtworks Holding (NASDAQ:TWKS), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Thoughtworks Holding is:

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

0.0028 = US$3.2m ÷ (US$1.3b - US$159m) (Based on the trailing twelve months to December 2023).

Therefore, Thoughtworks Holding has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

View our latest analysis for Thoughtworks Holding

In the above chart we have measured Thoughtworks Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Thoughtworks Holding .

So How Is Thoughtworks Holding's ROCE Trending?

When we looked at the ROCE trend at Thoughtworks Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.1% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by Thoughtworks Holding's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 66% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Thoughtworks Holding, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.