Returns Are Gaining Momentum At Softchoice (TSE:SFTC)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Softchoice (TSE:SFTC) so let's look a bit deeper.

What Is 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. To calculate this metric for Softchoice, this is the formula:

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

0.19 = US$39m ÷ (US$591m - US$381m) (Based on the trailing twelve months to September 2022).

Therefore, Softchoice has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Electronic industry.

Check out the opportunities and risks within the CA Electronic industry.

In the above chart we have measured Softchoice's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Softchoice here for free.

What Does the ROCE Trend For Softchoice Tell Us?

Softchoice has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 153% over the last two years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Softchoice's current liabilities are still rather high at 64% of total assets. 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 Softchoice's ROCE

In summary, we're delighted to see that Softchoice has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 39% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Softchoice, we've discovered 2 warning signs 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.