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. Although, when we looked at Clearwater Analytics Holdings (NYSE:CWAN), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Clearwater Analytics Holdings:

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

0.028 = US$10m ÷ (US$401m - US$30m) (Based on the trailing twelve months to June 2022).

Therefore, Clearwater Analytics Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10%.

View our latest analysis for Clearwater Analytics Holdings

Above you can see how the current ROCE for Clearwater Analytics Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Clearwater Analytics Holdings.

How Are Returns Trending?

In terms of Clearwater Analytics Holdings' historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 4.6%, but since then they've fallen to 2.8%. 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.

On a related note, Clearwater Analytics Holdings has decreased its current liabilities to 7.4% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

While returns have fallen for Clearwater Analytics Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 35% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Clearwater Analytics Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Clearwater Analytics Holdings 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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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.