If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. And in light of that, the trends we're seeing at Consensus Cloud Solutions' (NASDAQ:CCSI) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Consensus Cloud Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = US$152m ÷ (US$707m - US$85m) (Based on the trailing twelve months to September 2023).
Thus, Consensus Cloud Solutions has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Software industry average of 8.1%.
See our latest analysis for Consensus Cloud Solutions
In the above chart we have measured Consensus Cloud Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Consensus Cloud Solutions here for free.
What Does the ROCE Trend For Consensus Cloud Solutions Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Consensus Cloud Solutions. We found that the returns on capital employed over the last three years have risen by 60%. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, Consensus Cloud Solutions appears to been achieving more with less, since the business is using 51% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From Consensus Cloud Solutions' ROCE
From what we've seen above, Consensus Cloud Solutions has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 68% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Consensus Cloud Solutions, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.
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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.