Returns At Temenos (VTX:TEMN) Appear To Be Weighed Down

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Temenos (VTX:TEMN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Temenos is:

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

0.14 = US$213m ÷ (US$2.3b - US$712m) (Based on the trailing twelve months to September 2024).

So, Temenos has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Software industry.

Check out our latest analysis for Temenos

Above you can see how the current ROCE for Temenos compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Temenos .

So How Is Temenos' ROCE Trending?

Over the past five years, Temenos' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Temenos doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Temenos has been paying out a decent 40% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Key Takeaway

In summary, Temenos isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 48% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Temenos has the makings of a multi-bagger.

Like most companies, Temenos does come with some risks, and we've found 1 warning sign that you should be aware of.

While Temenos may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.