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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. That's why when we briefly looked at Amdocs' (NASDAQ:DOX) ROCE trend, we were pretty happy with what we saw.
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. Analysts use this formula to calculate it for Amdocs:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$760m ÷ (US$6.4b - US$1.5b) (Based on the trailing twelve months to September 2024).
So, Amdocs has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 11% it's much better.
See our latest analysis for Amdocs
In the above chart we have measured Amdocs' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Amdocs .
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 20% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Amdocs has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
To sum it up, Amdocs has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 24% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Amdocs is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
While Amdocs doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for DOX on our platform.