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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Consensus Cloud Solutions' (NASDAQ:CCSI) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Consensus Cloud Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$149m ÷ (US$602m - US$79m) (Based on the trailing twelve months to December 2024).
Therefore, Consensus Cloud Solutions has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.
Check out 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 for free.
The Trend Of ROCE
Consensus Cloud Solutions has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 87%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 58% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
In Conclusion...
In a nutshell, we're pleased to see that Consensus Cloud Solutions has been able to generate higher returns from less capital. Given the stock has declined 51% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.