Formula Systems (1985) (TLV:FORTY) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Formula Systems (1985) (TLV:FORTY) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Formula Systems (1985), this is the formula:

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

0.13 = US$237m ÷ (US$2.7b - US$917m) (Based on the trailing twelve months to September 2022).

Thus, Formula Systems (1985) has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the IT industry average it falls behind.

Our analysis indicates that FORTY is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Formula Systems (1985)'s ROCE against it's prior returns. If you'd like to look at how Formula Systems (1985) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Formula Systems (1985)'s ROCE Trending?

We like the trends that we're seeing from Formula Systems (1985). The data shows that returns on capital have increased substantially over the last five years to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 59%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

To sum it up, Formula Systems (1985) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 94% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Formula Systems (1985) can keep these trends up, it could have a bright future ahead.

While Formula Systems (1985) looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether FORTY is currently trading for a fair price.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.