Descartes Systems Group (TSE:DSG) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Descartes Systems Group (TSE:DSG) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Descartes Systems Group is:

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

0.12 = US$136m ÷ (US$1.3b - US$170m) (Based on the trailing twelve months to January 2023).

So, Descartes Systems Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.9% it's much better.

Check out our latest analysis for Descartes Systems Group

Above you can see how the current ROCE for Descartes Systems Group 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 Descartes Systems Group here for free.

SWOT Analysis for Descartes Systems Group

What Does the ROCE Trend For Descartes Systems Group Tell Us?

The trends we've noticed at Descartes Systems Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 106%. So we're very much inspired by what we're seeing at Descartes Systems Group thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Descartes Systems Group has. And a remarkable 165% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Descartes Systems Group looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether DSG is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.