Newgen Software Technologies (NSE:NEWGEN) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Newgen Software Technologies (NSE:NEWGEN), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

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 Newgen Software Technologies is:

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

0.22 = ₹2.4b ÷ (₹14b - ₹2.8b) (Based on the trailing twelve months to December 2023).

So, Newgen Software Technologies has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Software industry average of 15%.

Check out our latest analysis for Newgen Software Technologies

Above you can see how the current ROCE for Newgen Software Technologies 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 Newgen Software Technologies .

What Can We Tell From Newgen Software Technologies' ROCE Trend?

We weren't thrilled with the trend because Newgen Software Technologies' ROCE has reduced by 21% over the last five years, while the business employed 148% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Newgen Software Technologies' earnings and if they change as a result from the capital raise.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Newgen Software Technologies. And long term investors must be optimistic going forward because the stock has returned a huge 424% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Newgen Software Technologies does have some risks though, and we've spotted 1 warning sign for Newgen Software Technologies that you might be interested in.

Newgen Software Technologies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.