Topicus.com (CVE:TOI) Will Be Hoping To Turn Its Returns On Capital Around

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 investigating Topicus.com (CVE:TOI), we don't think it's current trends fit the mold of a multi-bagger.

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 Topicus.com is:

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

0.15 = €120m ÷ (€1.5b - €656m) (Based on the trailing twelve months to June 2023).

Thus, Topicus.com has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Software industry.

View our latest analysis for Topicus.com

Historical performance is a great place to start when researching a stock so above you can see the gauge for Topicus.com's ROCE against it's prior returns. If you're interested in investigating Topicus.com's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Topicus.com Tell Us?

In terms of Topicus.com's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 15% from 19% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Topicus.com has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Topicus.com's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Topicus.com is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 25% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 1 warning sign for Topicus.com that we think you should be aware of.

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.