Broadridge Financial Solutions (NYSE:BR) Will Be Hoping To Turn Its Returns On Capital Around
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Broadridge Financial Solutions (NYSE:BR), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Broadridge Financial Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$783m ÷ (US$8.1b - US$1.0b) (Based on the trailing twelve months to December 2022).
Thus, Broadridge Financial Solutions has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the IT industry.
View our latest analysis for Broadridge Financial Solutions
Above you can see how the current ROCE for Broadridge Financial Solutions 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.
So How Is Broadridge Financial Solutions' ROCE Trending?
On the surface, the trend of ROCE at Broadridge Financial Solutions doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Broadridge Financial Solutions' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 70% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know more about Broadridge Financial Solutions, we've spotted 2 warning signs, and 1 of them is potentially serious.
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.
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