There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Temenos (VTX:TEMN) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
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 Temenos is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$234m ÷ (US$2.1b - US$596m) (Based on the trailing twelve months to March 2021).
Therefore, Temenos has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Software industry.
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 report for Temenos.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 87% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Temenos has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Temenos' ROCE
In the end, Temenos has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 151% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing to note, we've identified 1 warning sign with Temenos and understanding this should be part of your investment process.
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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