We Like These Underlying Return On Capital Trends At Conduent (NASDAQ:CNDT)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Conduent (NASDAQ:CNDT) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Conduent, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$151m ÷ (US$3.9b - US$933m) (Based on the trailing twelve months to September 2022).
So, Conduent has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.
View our latest analysis for Conduent
In the above chart we have measured Conduent'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 Conduent here for free.
What Can We Tell From Conduent's ROCE Trend?
We're delighted to see that Conduent is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 5.1% which is no doubt a relief for some early shareholders. In regards to capital employed, Conduent is using 53% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
In Conclusion...
In summary, it's great to see that Conduent has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 73% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
One more thing to note, we've identified 1 warning sign with Conduent and understanding it should be part of your investment process.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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