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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Looking at Accenture (NYSE:ACN), it does have a high ROCE right now, but lets see how returns are trending.
Understanding 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 Accenture, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$9.1b ÷ (US$46b - US$17b) (Based on the trailing twelve months to May 2022).
Thus, Accenture has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
In the above chart we have measured Accenture's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Accenture.
What Does the ROCE Trend For Accenture Tell Us?
When we looked at the ROCE trend at Accenture, we didn't gain much confidence. Historically returns on capital were even higher at 42%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Accenture. And long term investors must be optimistic going forward because the stock has returned a huge 144% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you're still interested in Accenture it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.