Topicus.com's (CVE:TOI) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Topicus.com's (CVE:TOI) trend of ROCE, we liked what we saw.

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. 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 = €118m ÷ (€1.3b - €534m) (Based on the trailing twelve months to September 2022).

Therefore, Topicus.com has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.7% it's much better.

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'd like to look at how Topicus.com has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

While the current returns on capital are decent, they haven't changed much. Over the past three years, ROCE has remained relatively flat at around 15% and the business has deployed 136% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Topicus.com has consistently earned this amount. 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.

On a separate but related note, it's important to know that Topicus.com has a current liabilities to total assets ratio of 41%, 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.

Our Take On Topicus.com's ROCE

In the end, Topicus.com has proven its ability to adequately reinvest capital at good rates of return. Yet over the last year the stock has declined 40%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know about the risks facing Topicus.com, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.