Will 8K Miles Software Services (NSE:8KMILES) Multiply In Value Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at 8K Miles Software Services (NSE:8KMILES) 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. Analysts use this formula to calculate it for 8K Miles Software Services:

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

0.17 = ₹180m ÷ (₹2.4b - ₹1.4b) (Based on the trailing twelve months to September 2020).

So, 8K Miles Software Services has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Software industry.

See our latest analysis for 8K Miles Software Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for 8K Miles Software Services' ROCE against it's prior returns. If you're interested in investigating 8K Miles Software Services' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For 8K Miles Software Services Tell Us?

We're a bit concerned with the trends, because the business is applying 52% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. So if this trend continues, don't be surprised if the business is smaller in a few years time.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 56% of total assets, this reported ROCE would probably be less than17% because total capital employed would be higher.The 17% ROCE could be even lower if current liabilities weren't 56% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line On 8K Miles Software Services' ROCE

It's a shame to see that 8K Miles Software Services is effectively shrinking in terms of its capital base. Moreover, since the stock has crumbled 86% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing 8K Miles Software Services we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While 8K Miles Software Services 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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