Fabasoft (ETR:FAA): Are Investors Overlooking Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Fabasoft's (ETR:FAA) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Fabasoft:

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

0.35 = €16m ÷ (€70m - €25m) (Based on the trailing twelve months to September 2020).

Thus, Fabasoft has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Software industry average of 15%.

View our latest analysis for Fabasoft

Above you can see how the current ROCE for Fabasoft compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Fabasoft Tell Us?

Fabasoft is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 205%. So we're very much inspired by what we're seeing at Fabasoft thanks to its ability to profitably reinvest capital.

What We Can Learn From Fabasoft's ROCE

To sum it up, Fabasoft has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 899% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Fabasoft, we've discovered 2 warning signs that you should be aware of.

Fabasoft is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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