If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Cognizant Technology Solutions (NASDAQ:CTSH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Cognizant Technology Solutions, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = US$2.9b ÷ (US$18b - US$3.3b) (Based on the trailing twelve months to December 2023).

Therefore, Cognizant Technology Solutions has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.

Check out our latest analysis for Cognizant Technology Solutions  roce

In the above chart we have measured Cognizant Technology Solutions' 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 freeanalyst report for Cognizant Technology Solutions .

What The Trend Of ROCE Can Tell Us

There hasn't been much to report for Cognizant Technology Solutions' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Cognizant Technology Solutions doesn't end up being a multi-bagger in a few years time.

The Key Takeaway

In a nutshell, Cognizant Technology Solutions has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 7.8% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Cognizant Technology Solutions, we've discovered 1 warning sign that you should be aware of.



If you want to search for solid companies with great earnings, check out this freelist 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.