Enghouse Systems (TSE:ENGH) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Enghouse Systems (TSE:ENGH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Enghouse Systems, this is the formula:

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

0.15 = CA$85m ÷ (CA$776m - CA$204m) (Based on the trailing twelve months to April 2023).

Therefore, Enghouse Systems has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Software industry.

View our latest analysis for Enghouse Systems

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

What Can We Tell From Enghouse Systems' ROCE Trend?

On the surface, the trend of ROCE at Enghouse Systems doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like Enghouse Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Enghouse Systems' ROCE

To conclude, we've found that Enghouse Systems is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Enghouse Systems has the makings of a multi-bagger.

If you're still interested in Enghouse Systems it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Enghouse Systems 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.