There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Check Point Software Technologies (NASDAQ:CHKP) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Check Point Software Technologies:

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

0.24 = US$893m ÷ (US$5.5b - US$1.8b) (Based on the trailing twelve months to March 2024).

Therefore, Check Point Software Technologies has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Software industry average of 7.4%.

In the above chart we have measured Check Point Software Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Check Point Software Technologies .

What Can We Tell From Check Point Software Technologies' ROCE Trend?

Over the past five years, Check Point Software Technologies' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.

Our Take On Check Point Software Technologies' ROCE

While Check Point Software Technologies has impressive profitability from its capital, it isn't increasing that amount of capital. And investors may be recognizing these trends since the stock has only returned a total of 31% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Check Point Software Technologies could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for CHKP on our platform quite valuable.

Check Point Software Technologies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.