Investors Shouldn't Overlook The Favourable Returns On Capital At Nemetschek (ETR:NEM)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Ergo, when we looked at the ROCE trends at Nemetschek (ETR:NEM), we liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Nemetschek, this is the formula:

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

0.27 = €195m ÷ (€1.1b - €424m) (Based on the trailing twelve months to June 2022).

Thus, Nemetschek has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.

Check out the opportunities and risks within the DE Software industry.

Above you can see how the current ROCE for Nemetschek 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 Nemetschek.

What Does the ROCE Trend For Nemetschek Tell Us?

It's hard not to be impressed by Nemetschek's returns on capital. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 163% more capital into its operations. Now considering ROCE is an attractive 27%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Nemetschek can keep this up, we'd be very optimistic about its future.

In Conclusion...

In short, we'd argue Nemetschek has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 91% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Nemetschek looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NEM is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.