Cerence (NASDAQ:CRNC) Has More To Do To Multiply In Value Going Forward
There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Cerence (NASDAQ:CRNC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Cerence is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = US$65m ÷ (US$1.6b - US$154m) (Based on the trailing twelve months to June 2022).
Therefore, Cerence has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Software industry average of 10%.
View our latest analysis for Cerence
In the above chart we have measured Cerence's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Cerence's ROCE Trend?
Things have been pretty stable at Cerence, with its capital employed and returns on that capital staying somewhat the same for the last four years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Cerence in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
Our Take On Cerence's ROCE
In a nutshell, Cerence has been trudging along with the same returns from the same amount of capital over the last four years. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Like most companies, Cerence does come with some risks, and we've found 1 warning sign that you should be aware of.
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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