Returns On Capital Are Showing Encouraging Signs At Descartes Systems Group (TSE:DSG)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Descartes Systems Group, this is the formula:

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

0.13 = US$185m ÷ (US$1.6b - US$219m) (Based on the trailing twelve months to October 2024).

Thus, Descartes Systems Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the Software industry.

See our latest analysis for Descartes Systems Group

In the above chart we have measured Descartes Systems Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Descartes Systems Group .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Descartes Systems Group. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 64% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Descartes Systems Group's ROCE

All in all, it's terrific to see that Descartes Systems Group is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Descartes Systems Group can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Descartes Systems Group that we think you should be aware of.

While Descartes Systems Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.