CLPS Incorporation (NASDAQ:CLPS) Is Reinvesting At Lower Rates Of Return – Yahoo Finance

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at CLPS Incorporation (NASDAQ:CLPS) and its ROCE trend, we weren't exactly thrilled.

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for CLPS Incorporation:

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

0.16 = US$11m (US$102m - US$33m) (Based on the trailing twelve months to December 2021).

Therefore, CLPS Incorporation has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.

View our latest analysis for CLPS Incorporation

roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how CLPS Incorporation has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

In terms of CLPS Incorporation's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 23% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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On a side note, CLPS Incorporation has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

While returns have fallen for CLPS Incorporation in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 72% over the last three years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

Like most companies, CLPS Incorporation does come with some risks, and we've found 2 warning signs that you should be aware of.

While CLPS Incorporation 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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CLPS Incorporation (NASDAQ:CLPS) Is Reinvesting At Lower Rates Of Return - Yahoo Finance