The return of CGI (TSE:GIB.A) has hit the wall
Finding a company that has the potential to grow significantly isn’t easy, but it is possible if we look at some key financial metrics. Typically, we want to identify a growth trend return on the capital employed (ROCE) and also an expansion base of the capital employed. This shows us that this is a compounding machine capable of continuously reinvesting its profits in the business and generating higher returns. So when we ran our eye over it CGI’s (TSE:GIB.A) ROCE Trend We like what we’ve seen.
Understand return on capital employed (ROCE).
If you’ve never worked with ROCE, it measures the “return” (profit before tax) that a company earns on the capital employed in its business. Analysts use this formula to calculate it for CGI:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = $2.1 billion ÷ ($15 billion – $3.8 billion) (Based on the last twelve months ended June 2022).
Because of this, CGI has a ROCE of 19%. On its own, that’s a standard return, but it’s a lot better than the 6.3% generated by the IT industry.
Check out our latest analysis for CGI
Above is how the current ROCE for CGI compares to its past returns on investments, but there’s only so much you can tell from the past. If you are interested, you can see the analysts’ predictions in our free Report on analysts’ forecasts for the company.
How are the yields developing?
While current returns on investments are decent, they haven’t changed much. The company has deployed 23% more capital over the past five years, and the return on that capital has remained steady at 19%. 19% is a fairly standard yield, and there’s some comfort in knowing that CGI has consistently earned that amount. Stable returns in this space can be unexciting, but if they can be sustained over the long term, they often offer nice rewards for shareholders.
Our approach to CGI’s ROCE
In summary, CGI has simply been steadily reinvesting capital at these decent returns. And the stock has followed suit, returning a whopping 63% to shareholders over the past five years. While investors seem to be recognizing these promising trends, we still believe the stock deserves further investigation.
CGI could trade at an attractive price in other respects, so you might find ours free valuation very valuable on our platform.
For those who like to invest solid companies, look at that free List of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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