Many Would Be Envious Of Alfa Financial Software Holdings' (LON:ALFA) Excellent Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Alfa Financial Software Holdings (LON:ALFA), we liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Alfa Financial Software Holdings is:

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

0.31 = UK£24m ÷ (UK£95m - UK£18m) (Based on the trailing twelve months to December 2020).

So, Alfa Financial Software Holdings has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Software industry average of 7.5%.

Check out our latest analysis for Alfa Financial Software Holdings

In the above chart we have measured Alfa Financial Software Holdings' prior ROCE against its prior performance, but the future is arguably more important. 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 Alfa Financial Software Holdings Tell Us?

In terms of Alfa Financial Software Holdings' history of ROCE, it's quite impressive. The company has consistently earned 31% for the last five years, and the capital employed within the business has risen 23% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Alfa Financial Software Holdings can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In short, we'd argue Alfa Financial Software Holdings has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last three years the stock has declined 59%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we've found 1 warning sign for Alfa Financial Software Holdings that we think you should be aware of.

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. 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.
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