Advertisement
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Absolute Software (TSE:ABST) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Absolute Software:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$15m ÷ (US$214m - US$110m) (Based on the trailing twelve months to December 2020).
Therefore, Absolute Software has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.
See our latest analysis for Absolute Software
Above you can see how the current ROCE for Absolute Software compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
On the surface, the trend of ROCE at Absolute Software doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 14%. However it looks like Absolute Software 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Absolute Software has decreased its current liabilities to 52% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 52% is still pretty high, so those risks are still somewhat prevalent.
What We Can Learn From Absolute Software's ROCE
In summary, Absolute Software is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 233% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know about the risks facing Absolute Software, we've discovered 3 warning signs that you should be aware of.
While Absolute Software 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.
If you decide to trade Absolute Software, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About TSX:ABST
Absolute Software
Absolute Software Corporation develops, markets, and provides software services that support the management and security of computing devices, applications, data, and networks for various organizations.
Undervalued average dividend payer.
Similar Companies
Market Insights
Advertisement
Weekly Picks
LO
Lou_Basenese on Optimi Health ·
The Only Psychedelic Company Already Selling MDMA and Psilocybin to Real Patients, Yet Priced Like It Doesn’t Exist
Fair Value:US$1157.5% undervalued
48 followersusers have followed this narrative
2 commentsusers have commented on this narrative
8 likesusers have liked this narrative
WE
WealthAP on Novo Nordisk ·
Novo Nordisk (NVO): Is the "Easy Growth" Story Over?
Fair Value:DKK 407.7721.4% undervalued
69 followersusers have followed this narrative
0 commentsusers have commented on this narrative
8 likesusers have liked this narrative
VA
ValueInvestingSubstack on Zoetis ·
Zoetis down -50% over the past year
Fair Value:US$92.9218.9% undervalued
23 followersusers have followed this narrative
0 commentsusers have commented on this narrative
9 likesusers have liked this narrative
CE
CentryResearch on Centrus Energy ·
Centrus Energy: The Next Nuclear Bottleneck Isn't Reactors. It's Fuel.
Fair Value:US$19013.7% undervalued
24 followersusers have followed this narrative
0 commentsusers have commented on this narrative
10 likesusers have liked this narrative
Recently Updated Narratives
WI
WisetoWealth on PayPal Holdings ·
The Underrated Transformation of a Digital Payments Giant
Fair Value:US$90.3137.8% undervalued
4 followersusers have followed this narrative
0 commentsusers have commented on this narrative
0 likesusers have liked this narrative
BL
Blagget on Terra Balcanica Resources ·
The C$4M Explorer Positioned to Become Europe's First Antimony Mine
Fair Value:CA$0.487.5% undervalued
3 followersusers have followed this narrative
0 commentsusers have commented on this narrative
0 likesusers have liked this narrative
DA
david_6nroa on Charter Communications ·
Charter is undervalued - Here's why.
Fair Value:US$87.0741.6% overvalued
1 followerusers have followed this narrative
0 commentsusers have commented on this narrative
0 likesusers have liked this narrative
Popular Narratives
CU
CubanEros on Microsoft ·
A wonderful business at reasonable price.
Fair Value:US$419.919.1% undervalued
81 followersusers have followed this narrative
0 commentsusers have commented on this narrative
6 likesusers have liked this narrative
OS
oscargarcia on NVIDIA ·
The company that went from selling GPUs to gamers to becoming the AI arms dealer of the 21st century.
Fair Value:US$28026.1% undervalued
188 followersusers have followed this narrative
9 commentsusers have commented on this narrative
15 likesusers have liked this narrative
BE
benjamin_lvieq on PayPal Holdings ·
PayPal: PayPal Doesn't Need to Grow – It Needs to Stop Falling – A Mispriced Cash Machine With a Cannibal Buyback
Fair Value:US$6513.6% undervalued
72 followersusers have followed this narrative
2 commentsusers have commented on this narrative
11 likesusers have liked this narrative
Trending Discussion
DE
derek_3wsdg on Teladoc Health ·
You’ve overlooked the activist investor factor. Travis Cocke’s Voss has announced 5% ownership through a 13G filing. They’ve added to that 5% since, and in doing so, have created a structural trap door for 27.42 Million Shares actively sold short. Chuck will announce lots of positives on July 29 but it’s what Voss announces shortly after that will rock the overextended Teledoc shorts. The Walmart partnership is the tip of the iceberg. The market is missing the sheer regulatory and enterprise friction of modern corporate healthcare. Teladoc isn't a "consumer app"; it is the primary digital infrastructure integrated directly into the legacy backends of Tier-1 insurance companies and fortune 500 employers, covering 105 million+ lives. Teladoc is acting as the digital top-of-funnel engine for the world's largest retailer. If Voss pushes the narrative that Teladoc is effectively the outsourced digital brain of Walmart's entire healthcare footprint, the fair value shifts from a basic health multiple to an enterprise distribution premium. Additionally , we are in a structural gold rush for high-quality, legally compliant, longitudinal medical data to train vertical healthcare AI models. Large technology hyperscalers and pharmaceutical giants cannot simply scrape the internet for this; they need structured clinical inputs. Teladoc sits on one of the largest de-identified virtual medical datasets on earth. From the activist playbook , we’ll see Voss demand the immediate creation of a Data & Diagnostics Licensing Division, transforming a legacy liability into an incredibly high-margin, pure-software data asset that requires zero human clinician hours to scale. Chuck is doing great work and deserves credi5 for the Teledoc turnaround but it will be Travis Cocke who will be responsible for a share price way beyond your $15 valuation.
1
|0
