If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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.
Understanding 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. To calculate this metric for EPAM Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$692m ÷ (US$4.0b - US$747m) (Based on the trailing twelve months to December 2022).
Therefore, EPAM Systems has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
View our latest analysis for EPAM Systems
In the above chart we have measured EPAM Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EPAM Systems here for free.
SWOT Analysis for EPAM Systems
- Debt is not viewed as a risk.
- Earnings declined over the past year.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Revenue is forecast to grow slower than 20% per year.
So How Is EPAM Systems' ROCE Trending?
The trends we've noticed at EPAM Systems are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 205%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what EPAM Systems has. And a remarkable 155% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if EPAM Systems can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 2 warning signs for EPAM Systems you'll probably want to know about.
EPAM Systems is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Valuation is complex, but we're here to simplify it.
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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.
About NYSE:EPAM
EPAM Systems
Provides digital platform engineering and software development services worldwide.
Flawless balance sheet and undervalued.
