Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Consensus Cloud Solutions' (NASDAQ:CCSI) returns on capital, so let's have a look.
What Is 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. The formula for this calculation on Consensus Cloud Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$151m ÷ (US$621m - US$74m) (Based on the trailing twelve months to March 2024).
Therefore, Consensus Cloud Solutions has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Software industry average of 7.2%.
Above you can see how the current ROCE for Consensus Cloud Solutions 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 Consensus Cloud Solutions for free.
What Does the ROCE Trend For Consensus Cloud Solutions Tell Us?
We're pretty happy with how the ROCE has been trending at Consensus Cloud Solutions. We found that the returns on capital employed over the last four years have risen by 81%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 57% less than it was four years ago, which can be indicative of a business that's improving its efficiency. Consensus Cloud Solutions may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Key Takeaway
In summary, it's great to see that Consensus Cloud Solutions has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 50% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Consensus Cloud Solutions (of which 2 can't be ignored!) that you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.
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