What Do The Returns On Capital At PSI Software (ETR:PSAN) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think PSI Software (ETR:PSAN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. To calculate this metric for PSI Software, this is the formula:

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).

So, PSI Software has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 14%.

View 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.

So How Is PSI Software's ROCE Trending?

The returns on capital haven't changed much for PSI Software in recent years. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 8.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, PSI Software has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 115% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't 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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