Returns At Esker (EPA:ALESK) Appear To Be Weighed Down

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. That's why when we briefly looked at Esker's (EPA:ALESK) ROCE trend, we were pretty happy with what we saw.

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. The formula for this calculation on Esker is:

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

0.19 = €17m ÷ (€119m - €30m) (Based on the trailing twelve months to June 2021).

Therefore, Esker has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Software industry.

View our latest analysis for Esker

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

What Does the ROCE Trend For Esker Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 79% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that Esker has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Esker's ROCE

The main thing to remember is that Esker has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 414% return they've received 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.

Esker does have some risks though, and we've spotted 1 warning sign for Esker that you might be interested in.

While Esker 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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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.