To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at CGI’s (TSE:GIB.A) ROCE trend, we were pretty happy with 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 CGI, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = CA$1.9b ÷ (CA$15b – CA$4.0b) (Based on the trailing twelve months to June 2021).
Thus, CGI has an ROCE of 18%. On its own, that’s a standard return, however it’s much better than the 12% generated by the IT industry.
In the above chart we have measured CGI’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 CGI.
What Can We Tell From CGI’s ROCE Trend?
While the returns on capital are good, they haven’t moved much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 24% more capital into its operations. Since 18% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On CGI’s ROCE
In the end, CGI has proven its ability to adequately reinvest capital at good rates of return. Therefore it’s no surprise that shareholders have earned a respectable 77% return if they held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Like most companies, CGI does come with some risks, and we’ve found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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