The Return Trends At Birlasoft (NSE:BSOFT) Look Promising

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Birlasoft (NSE:BSOFT) and its trend of ROCE, we really liked what we saw.

We've discovered 2 warning signs about Birlasoft. View them for free.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Birlasoft:

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

0.19 = ₹6.6b ÷ (₹42b - ₹7.7b) (Based on the trailing twelve months to December 2024).

Thus, Birlasoft has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 12% it's much better.

View our latest analysis for Birlasoft

In the above chart we have measured Birlasoft's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Birlasoft for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Birlasoft are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 76% more capital is being employed now too. So we're very much inspired by what we're seeing at Birlasoft thanks to its ability to profitably reinvest capital.

Our Take On Birlasoft's ROCE

In summary, it's great to see that Birlasoft can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 604% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

On a separate note, we've found 2 warning signs for Birlasoft 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.