Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Beyondsoft (SZSE:002649), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Beyondsoft, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = CN¥270m ÷ (CN¥5.4b - CN¥1.3b) (Based on the trailing twelve months to September 2023).
Therefore, Beyondsoft has an ROCE of 6.6%. On its own that's a low return, but compared to the average of 4.4% generated by the IT industry, it's much better.
Above you can see how the current ROCE for Beyondsoft compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Beyondsoft for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Beyondsoft doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Beyondsoft might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Beyondsoft's ROCE
Bringing it all together, while we're somewhat encouraged by Beyondsoft's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 8.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Beyondsoft does have some risks though, and we've spotted 2 warning signs for Beyondsoft that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.