Enghouse Systems (TSE:ENGH) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. That's why when we briefly looked at Enghouse Systems' (TSE:ENGH) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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)

0.17 = CA$94m ÷ (CA$705m - CA$164m) (Based on the trailing twelve months to October 2022).

So, Enghouse Systems has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.9% it's much better.

View our latest analysis for Enghouse Systems

In the above chart we have measured Enghouse Systems' 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Enghouse Systems Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 61% more capital into its operations. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Enghouse Systems' ROCE

The main thing to remember is that Enghouse Systems has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 36% over the last five years for shareholders who have owned the stock in this period. So to determine if Enghouse Systems is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Like most companies, Enghouse Systems does come with some risks, and we've found 1 warning sign that you should be aware of.

While Enghouse Systems 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.

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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.