If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of EPAM Systems (NYSE:EPAM) we really liked 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. Analysts use this formula to calculate it for EPAM Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$659m ÷ (US$3.6b - US$685m) (Based on the trailing twelve months to June 2022).
Thus, EPAM Systems has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Above you can see how the current ROCE for EPAM Systems 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 EPAM Systems.
The Trend Of ROCE
We like the trends that we're seeing from EPAM Systems. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 203% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From EPAM Systems' ROCE
All in all, it's terrific to see that EPAM Systems is reaping the rewards from prior investments and is growing its capital base. And a remarkable 302% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
EPAM Systems does have some risks though, and we've spotted 3 warning signs for EPAM Systems that you might be interested in.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
What are the risks and opportunities for EPAM Systems?
Trading at 0.8% below our estimate of its fair value
Earnings are forecast to grow 36.29% per year
Profit margins (8.7%) are lower than last year (12.6%)
Large one-off items impacting financial results
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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.
EPAM Systems, Inc. provides digital platform engineering and software development services worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet with high growth potential.