Formula Systems (1985)'s (TLV:FORTY) Returns On Capital Are Heading Higher
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Formula Systems (1985) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$252m ÷ (US$2.9b - US$981m) (Based on the trailing twelve months to September 2024).
Thus, Formula Systems (1985) has an ROCE of 14%. In isolation, that's a pretty standard return but against the IT industry average of 20%, it's not as good.
See our latest analysis for Formula Systems (1985)
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're interested in investigating Formula Systems (1985)'s past further, check out this free graph covering Formula Systems (1985)'s past earnings, revenue and cash flow.
What Can We Tell From Formula Systems (1985)'s ROCE Trend?
The trends we've noticed at Formula Systems (1985) are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 14%. 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 39%. 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 Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Formula Systems (1985) has. And with a respectable 49% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for FORTY that compares the share price and estimated value.
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.
About TASE:FORTY
Formula Systems (1985)
Through its subsidiaries, provides proprietary and non-proprietary software solutions, Information Technologies (IT) professional services, software product marketing and support, computer infrastructure and integration solutions, and learning and integration.
Flawless balance sheet with solid track record.
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