Dropsuite's (ASX:DSE) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Dropsuite (ASX:DSE) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Dropsuite:

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

0.012 = AU$356k ÷ (AU$33m - AU$4.1m) (Based on the trailing twelve months to June 2024).

Thus, Dropsuite has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.8%.

See our latest analysis for Dropsuite

Above you can see how the current ROCE for Dropsuite compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Dropsuite .

The Trend Of ROCE

Dropsuite has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. Not only that, but the company is utilizing 704% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that Dropsuite's reinvestment activities have paid off and the company is now profitable. And a remarkable 947% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Dropsuite can keep these trends up, it could have a bright future ahead.

Like most companies, Dropsuite does come with some risks, and we've found 2 warning signs that you should be aware of.

While Dropsuite 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.