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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Genpact's (NYSE:G) trend of ROCE, we liked what we saw.
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 Genpact, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$514m ÷ (US$5.0b - US$1.4b) (Based on the trailing twelve months to March 2022).
Therefore, Genpact has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the IT industry.
Above you can see how the current ROCE for Genpact 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 Genpact here for free.
What Does the ROCE Trend For Genpact Tell Us?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 50% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Genpact has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Genpact's ROCE
The main thing to remember is that Genpact has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a separate note, we've found 2 warning signs for Genpact you'll probably want to know about.
While Genpact isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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