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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Ceridian HCM Holding (NYSE:CDAY) so let's look a bit deeper.
Understanding 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. Analysts use this formula to calculate it for Ceridian HCM Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$74m ÷ (US$5.9b - US$2.7b) (Based on the trailing twelve months to September 2020).
Thus, Ceridian HCM Holding has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10.0%.
Above you can see how the current ROCE for Ceridian HCM Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ceridian HCM Holding here for free.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last four years to 2.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 31%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 46%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ceridian HCM Holding has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ceridian HCM Holding has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 28% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know more about Ceridian HCM Holding, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.
While Ceridian HCM Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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