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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.
Return On Capital Employed (ROCE): What is it?
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 Broadridge Financial Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = US$679m ÷ (US$8.1b - US$1.3b) (Based on the trailing twelve months to June 2021).
Therefore, Broadridge Financial Solutions has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the IT industry average of 12%.
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'd like, you can check out the forecasts from the analysts covering Broadridge Financial Solutions here for free.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Broadridge Financial Solutions, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 9.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Broadridge Financial Solutions' ROCE
While returns have fallen for Broadridge Financial Solutions in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 170% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing: We've identified 2 warning signs with Broadridge Financial Solutions (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
While Broadridge Financial Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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