We Like These Underlying Return On Capital Trends At Descartes Systems Group (TSE:DSG)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Descartes Systems Group (TSE:DSG) so let's look a bit deeper.

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. 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$164m ÷ (US$1.5b - US$204m) (Based on the trailing twelve months to January 2024).

Therefore, Descartes Systems Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 9.6% it's much better.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Descartes Systems Group .

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Descartes Systems Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 118%. So we're very much inspired by what we're seeing at Descartes Systems Group thanks to its ability to profitably reinvest capital.

In Conclusion...

In summary, it's great to see that Descartes Systems Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. 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.

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

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.