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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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Conduent (NASDAQ:CNDT) so let's look a bit deeper.
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. To calculate this metric for Conduent, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0033 = US$11m ÷ (US$4.4b - US$1.0b) (Based on the trailing twelve months to September 2020).
Therefore, Conduent has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.6%.
In the above chart we have measured Conduent'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.
How Are Returns Trending?
Like most people, we're pleased that Conduent is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.3% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 48%. Conduent could be selling under-performing assets since the ROCE is improving.
The Bottom Line On Conduent's ROCE
From what we've seen above, Conduent has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 71% over the last three years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Conduent does have some risks though, and we've spotted 2 warning signs for Conduent that you might be interested in.
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.
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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