What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Beta Systems Software's (FRA:BSS) trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Beta Systems Software, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = €20m ÷ (€126m - €35m) (Based on the trailing twelve months to September 2022).
Therefore, Beta Systems Software has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.
See our latest analysis for Beta Systems Software
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 Beta Systems Software has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Beta Systems Software's ROCE Trending?
It's hard not to be impressed by Beta Systems Software's returns on capital. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 51% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Beta Systems Software can keep this up, we'd be very optimistic about its future.
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 81% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
While Beta Systems Software looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether BSS is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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