Capital Investments At Enghouse Systems (TSE:ENGH) Point To A Promising Future

By
Simply Wall St
Published
April 25, 2022
TSX:ENGH
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ergo, when we looked at the ROCE trends at Enghouse Systems (TSE:ENGH), we liked what we saw.

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. The formula for this calculation on Enghouse Systems is:

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

0.21 = CA$109m ÷ (CA$699m - CA$184m) (Based on the trailing twelve months to January 2022).

So, Enghouse Systems has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for Enghouse Systems

roce
TSX:ENGH Return on Capital Employed April 25th 2022

In the above chart we have measured Enghouse Systems' 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 report for Enghouse Systems.

What The Trend Of ROCE Can Tell Us

Enghouse Systems deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 74% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Enghouse Systems can keep this up, we'd be very optimistic about its future.

The Bottom Line On Enghouse Systems' ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last five years, the stock has only delivered a 28% return to shareholders who held over that period. So to determine if Enghouse Systems is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Enghouse Systems does have some risks though, and we've spotted 2 warning signs for Enghouse Systems that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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