Here's What To Make Of Cerence's (NASDAQ:CRNC) Decelerating Rates Of Return
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Cerence:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = US$42m ÷ (US$1.3b - US$120m) (Based on the trailing twelve months to December 2023).
So, Cerence has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.4%.
Check out our latest analysis for Cerence
Above you can see how the current ROCE for Cerence 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 Cerence for free.
What Does the ROCE Trend For Cerence Tell Us?
Over the past five years, Cerence's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Cerence doesn't end up being a multi-bagger in a few years time.
The Bottom Line On Cerence's ROCE
In summary, Cerence isn't compounding its earnings but is generating stable returns on the same amount of capital employed. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 86% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a separate note, we've found 2 warning signs for Cerence you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
