The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Accenture plc (NYSE:ACN)’s return fundamentals and stock market performance.
If you purchase a ACN share you are effectively becoming a partner with many other shareholders. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Accenture, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
ROCE: Explanation and Calculation
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Accenture is good at growing investor capital. I have calculated Accenture’s ROCE for you below:
ROCE Calculation for ACN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$5.8b ÷ (US$24b – US$10b) = 41%
As you can see, ACN earned $40.9 from every $100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Accenture is currently able to return a fantastic amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.
Does this mean I should invest?
Accenture’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Accenture is in a favourable position, but this can change if these factors underperform. Because of this, it is important to look beyond the final value of ACN’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that ACN’s ROCE has decreased from 46%. Over the same period, EBT went from US$4.5b to US$5.8b but capital employed has increased by a proportionally greater amount due to a hike in the level of total assets , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.
ROCE for ACN investors has declined in the last few years, however, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation. If you don’t pay attention to these factors you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate ACN or other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for ACN’s future growth? Take a look at our free research report of analyst consensus for ACN’s outlook.
- Valuation: What is ACN worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ACN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.