If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Beyondsoft (SZSE:002649) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Beyondsoft is:

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

0.065 = CN¥264m ÷ (CN¥5.2b - CN¥1.2b) (Based on the trailing twelve months to March 2024).

So, Beyondsoft has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 3.9% generated by the IT industry, it's much better.

In the above chart we have measured Beyondsoft's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Beyondsoft for free.

So How Is Beyondsoft's ROCE Trending?

There are better returns on capital out there than what we're seeing at Beyondsoft. The company has employed 35% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Beyondsoft's ROCE

Long story short, while Beyondsoft has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 15% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Beyondsoft, we've discovered 1 warning sign that you should be aware of.

While Beyondsoft 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.

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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.

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