Yahoo Finance Returns On Capital At Cerner (NASDAQ:CERN) Paint An Interesting Picture
If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Cerner (NASDAQ:CERN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 Cerner, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$867m ÷ (US$7.5b - US$1.2b) (Based on the trailing twelve months to December 2020).
Thus, Cerner has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Healthcare Services industry.
See our latest analysis for Cerner
In the above chart we have measured Cerner's 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 report for Cerner.
How Are Returns Trending?
When we looked at the ROCE trend at Cerner, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Cerner's ROCE
Bringing it all together, while we're somewhat encouraged by Cerner's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you're still interested in Cerner it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Cerner may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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