Capital Investments At CGI (TSE:GIB.A) Point To A Promising Future
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. That's why when we briefly looked at CGI's (TSE:GIB.A) ROCE trend, we were very happy with what we saw.
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. The formula for this calculation on CGI is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CA$2.3b ÷ (CA$16b - CA$4.6b) (Based on the trailing twelve months to September 2023).
So, CGI has an ROCE of 21%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.
View our latest analysis for CGI
In the above chart we have measured CGI's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CGI here for free.
What Can We Tell From CGI's ROCE Trend?
It's hard not to be impressed by CGI's returns on capital. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 27% in that time. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If CGI can keep this up, we'd be very optimistic about its future.
Our Take On CGI's ROCE
CGI has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 67% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
While CGI looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GIB.A is currently trading for a fair price.
CGI is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
