Enghouse Systems (TSE:ENGH) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Enghouse Systems (TSE:ENGH), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.14 = CA$85m ÷ (CA$784m - CA$198m) (Based on the trailing twelve months to October 2023).

Therefore, Enghouse Systems has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 7.1% it's much better.

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?

When we looked at the ROCE trend at Enghouse Systems, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 14%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Enghouse Systems is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 12% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

While Enghouse Systems doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.