Our Take On The Returns On Capital At Perspecta (NYSE:PRSP)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Perspecta (NYSE:PRSP), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Perspecta:

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

0.055 = US$231m ÷ (US$5.3b - US$1.1b) (Based on the trailing twelve months to October 2020).

So, Perspecta has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the IT industry average of 9.9%.

View our latest analysis for Perspecta

Above you can see how the current ROCE for Perspecta compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Perspecta Tell Us?

On the surface, the trend of ROCE at Perspecta doesn't inspire confidence. To be more specific, ROCE has fallen from 33% over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Perspecta has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that Perspecta is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 2.5% to shareholders over the last year. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Perspecta does have some risks though, and we've spotted 1 warning sign for Perspecta that you might be interested in.

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. 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.
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