Some Investors May Be Worried About Oracle Financial Services Software's (NSE:OFSS) Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Oracle Financial Services Software (NSE:OFSS), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Oracle Financial Services Software is:

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

0.33 = ₹26b ÷ (₹92b - ₹12b) (Based on the trailing twelve months to December 2023).

So, Oracle Financial Services Software has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Software industry average of 15%.

View our latest analysis for Oracle Financial Services Software

In the above chart we have measured Oracle Financial Services Software'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 Oracle Financial Services Software for free.

What Does the ROCE Trend For Oracle Financial Services Software Tell Us?

On the surface, the trend of ROCE at Oracle Financial Services Software doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 41%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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 Oracle Financial Services Software. And long term investors must be optimistic going forward because the stock has returned a huge 184% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Oracle Financial Services Software, we've spotted 4 warning signs, and 2 of them are significant.

Oracle Financial Services Software 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.

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.