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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Accenture’s (NYSE:ACN) trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Accenture, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.29 = US$10b ÷ (US$51b – US$16b) (Based on the trailing twelve months to February 2024).
Thus, Accenture has an ROCE of 29%. That’s a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
See our latest analysis for Accenture
Above you can see how the current ROCE for Accenture compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free analyst report for Accenture .
What Can We Tell From Accenture’s ROCE Trend?
We’d be pretty happy with returns on capital like Accenture. The company has employed 105% more capital in the last five years, and the returns on that capital have remained stable at 29%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
What We Can Learn From Accenture’s ROCE
Accenture has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. And the stock has followed suit returning a meaningful 87% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation for ACN on our platform that is definitely worth checking out.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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