Returns On Capital At Alfa Financial Software Holdings (LON:ALFA) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Alfa Financial Software Holdings (LON:ALFA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Alfa Financial Software Holdings, this is the formula:

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

0.17 = UK£19m ÷ (UK£133m - UK£25m) (Based on the trailing twelve months to June 2020).

Therefore, Alfa Financial Software Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Software industry.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Alfa Financial Software Holdings.

So How Is Alfa Financial Software Holdings' ROCE Trending?

We weren't thrilled with the trend because Alfa Financial Software Holdings' ROCE has reduced by 55% over the last five years, while the business employed 102% more capital. That being said, Alfa Financial Software Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Alfa Financial Software Holdings' earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

Our Take On Alfa Financial Software Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Alfa Financial Software Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 67% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Alfa Financial Software Holdings, we've discovered 1 warning sign that you should be aware of.

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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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