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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Sprinklr's (NYSE:CXM) returns on capital, so let's have a look.
What Is 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. The formula for this calculation on Sprinklr is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$37m ÷ (US$984m - US$459m) (Based on the trailing twelve months to July 2024).
So, Sprinklr has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.4% average generated by the Software industry.
Above you can see how the current ROCE for Sprinklr 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 Sprinklr for free.
What The Trend Of ROCE Can Tell Us
The fact that Sprinklr is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 7.1% on its capital. In addition to that, Sprinklr is employing 244% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
One more thing to note, Sprinklr has decreased current liabilities to 47% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
What We Can Learn From Sprinklr's ROCE
Overall, Sprinklr gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 56% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 1 warning sign facing Sprinklr that you might find interesting.
While Sprinklr 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.
