Birlasoft (NSE:BSOFT) Is Investing Its Capital With Increasing Efficiency

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Birlasoft (NSE:BSOFT) looks great, so lets see what the trend can tell us.

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 Birlasoft:

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

0.25 = ₹7.0b ÷ (₹36b - ₹7.2b) (Based on the trailing twelve months to December 2023).

Therefore, Birlasoft has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Software industry average of 15%.

See our latest analysis for Birlasoft

Above you can see how the current ROCE for Birlasoft compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Birlasoft .

So How Is Birlasoft's ROCE Trending?

We like the trends that we're seeing from Birlasoft. Over the last five years, returns on capital employed have risen substantially to 25%. 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 31%. So we're very much inspired by what we're seeing at Birlasoft thanks to its ability to profitably reinvest capital.

What We Can Learn From Birlasoft's ROCE

To sum it up, Birlasoft has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 694% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Birlasoft can keep these trends up, it could have a bright future ahead.

If you want to continue researching Birlasoft, you might be interested to know about the 2 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.