If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Cognizant Technology Solutions' (NASDAQ:CTSH) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Cognizant Technology Solutions, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = US$3.0b ÷ (US$20b - US$3.4b) (Based on the trailing twelve months to September 2024).

Therefore, Cognizant Technology Solutions has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the IT industry.

See our latest analysis for Cognizant Technology Solutions

Above you can see how the current ROCE for Cognizant Technology 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 Cognizant Technology Solutions for free.

What Does the ROCE Trend For Cognizant Technology Solutions Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 30% more capital into its operations. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

Our Take On Cognizant Technology Solutions' ROCE

In the end, Cognizant Technology Solutions has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 38% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.