Here's What's Concerning About Globant's (NYSE:GLOB) 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. However, after investigating Globant (NYSE:GLOB), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Globant, this is the formula:

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

0.10 = US$145m ÷ (US$1.8b - US$327m) (Based on the trailing twelve months to September 2021).

Thus, Globant has an ROCE of 10.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

See our latest analysis for Globant

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

How Are Returns Trending?

When we looked at the ROCE trend at Globant, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 10.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Globant. And long term investors must be optimistic going forward because the stock has returned a huge 852% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing, we've spotted 1 warning sign facing Globant that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.