We Like These Underlying Trends At Formula Systems (1985) (TLV:FORTY)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Formula Systems (1985) (TLV:FORTY) looks quite promising in regards to its trends of return on capital.

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)

0.10 = US$162m ÷ (US$2.2b - US$656m) (Based on the trailing twelve months to September 2020).

Thus, Formula Systems (1985) has an ROCE of 10%. In isolation, that's a pretty standard return but against the IT industry average of 16%, it's not as good.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Formula Systems (1985), check out these free graphs here.

What Can We Tell From Formula Systems (1985)'s ROCE Trend?

Investors would be pleased with what's happening at Formula Systems (1985). The data shows that returns on capital have increased substantially over the last five years to 10%. 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 66%. 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

Formula Systems (1985) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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