There's Been No Shortage Of Growth Recently For Sprinklr's (NYSE:CXM) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Sprinklr (NYSE:CXM) so let's look a bit deeper.

What Is 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 Sprinklr:

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

0.02 = US$14m ÷ (US$1.1b - US$399m) (Based on the trailing twelve months to October 2023).

So, Sprinklr has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Software industry average of 7.7%.

View our latest analysis for Sprinklr

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

What Can We Tell From Sprinklr's ROCE Trend?

Sprinklr has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 2.0% on its capital. In addition to that, Sprinklr is employing 208% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Sprinklr has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Sprinklr's ROCE

To the delight of most shareholders, Sprinklr has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 56% return over the last year. In light of that, we think it's worth looking further into this stock because if Sprinklr can keep these trends up, it could have a bright future ahead.

Like most companies, Sprinklr does come with some risks, and we've found 2 warning signs that you should be aware of.

While Sprinklr 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.