We Like Newgen Software Technologies' (NSE:NEWGEN) Returns And Here's How They're Trending

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Newgen Software Technologies' (NSE:NEWGEN) returns on capital, so let's have a look.

What is 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. To calculate this metric for Newgen Software Technologies, this is the formula:

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

0.25 = ₹1.6b ÷ (₹8.2b - ₹2.0b) (Based on the trailing twelve months to December 2020).

Thus, Newgen Software Technologies has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Software industry average of 12%.

See 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'd like, you can check out the forecasts from the analysts covering Newgen Software Technologies here for free.

How Are Returns Trending?

The trends we've noticed at Newgen Software Technologies are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably 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 161%. So we're very much inspired by what we're seeing at Newgen Software Technologies thanks to its ability to profitably reinvest capital.

What We Can Learn From Newgen Software Technologies' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Newgen Software Technologies has. Since the stock has returned a solid 26% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Newgen Software Technologies can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Newgen Software Technologies that we think you should be aware of.

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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