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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at PSI Software (ETR:PSAN) and its ROCE trend, we weren't exactly thrilled.
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 PSI Software is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = €15m ÷ (€253m - €73m) (Based on the trailing twelve months to September 2020).
Therefore, PSI Software has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Software industry average of 13%.
Check out our latest analysis for PSI Software
In the above chart we have measured PSI Software'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 PSI Software here for free.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at PSI Software. The company has consistently earned 8.1% for the last five years, and the capital employed within the business has risen 50% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From PSI Software's ROCE
As we've seen above, PSI Software's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 97% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you're still interested in PSI Software it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While PSI Software 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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About XTRA:PSAN
PSI Software
Develops and integrates software solutions and products for optimizing the flow of energy and materials for utilities and industry worldwide.
High growth potential and good value.
