Returns Are Gaining Momentum At FCS Software Solutions (NSE:FCSSOFT)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at FCS Software Solutions (NSE:FCSSOFT) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on FCS Software Solutions is:

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

0.0059 = ₹22m ÷ (₹3.9b - ₹105m) (Based on the trailing twelve months to June 2023).

Therefore, FCS Software Solutions has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 15%.

See our latest analysis for FCS Software Solutions

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

What Can We Tell From FCS Software Solutions' ROCE Trend?

FCS Software Solutions has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 0.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by FCS Software Solutions has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From FCS Software Solutions' ROCE

To sum it up, FCS Software Solutions is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with FCS Software Solutions (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While FCS Software Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.