Investors Should Be Encouraged By CDW's (NASDAQ:CDW) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at CDW's (NASDAQ:CDW) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for CDW, this is the formula:

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

0.24 = US$1.3b ÷ (US$9.1b - US$3.7b) (Based on the trailing twelve months to March 2021).

So, CDW has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electronic industry average of 9.7%.

View our latest analysis for CDW

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

How Are Returns Trending?

CDW is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 48% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, we're delighted to see that CDW has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 338% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

CDW does have some risks though, and we've spotted 2 warning signs for CDW 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.

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