Returns On Capital Are Showing Encouraging Signs At Compucom Software (NSE:COMPUSOFT)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Compucom Software's (NSE:COMPUSOFT) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Compucom Software:

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

0.051 = ₹78m ÷ (₹1.7b - ₹205m) (Based on the trailing twelve months to June 2023).

Therefore, Compucom Software has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 11%.

See our latest analysis for Compucom Software

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compucom Software's ROCE against it's prior returns. If you're interested in investigating Compucom Software's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Compucom Software is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 102% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Compucom Software's ROCE

To bring it all together, Compucom Software has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 106% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 3 warning signs for Compucom Software you'll probably want to know about.

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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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.