ServiceNow (NYSE:NOW) Is Doing The Right Things To Multiply Its Share Price

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at ServiceNow (NYSE:NOW) so let's look a bit deeper.

What Is 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 ServiceNow, this is the formula:

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

0.052 = US$412m ÷ (US$14b - US$5.8b) (Based on the trailing twelve months to March 2023).

Thus, ServiceNow has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Software industry average of 9.4%.

View our latest analysis for ServiceNow

In the above chart we have measured ServiceNow's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ServiceNow.

SWOT Analysis for ServiceNow

How Are Returns Trending?

ServiceNow 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 five years ago but is is now generating 5.2% on its capital. And unsurprisingly, like most companies trying to break into the black, ServiceNow is utilizing 389% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, ServiceNow has decreased current liabilities to 42% 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line On ServiceNow's ROCE

Overall, ServiceNow gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if ServiceNow can keep these trends up, it could have a bright future ahead.

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

While ServiceNow may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.