Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Saksoft (NSE:SAKSOFT) looks attractive right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Saksoft:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = ₹531m ÷ (₹3.2b - ₹570m) (Based on the trailing twelve months to September 2020).
Therefore, Saksoft has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.
Check out our latest analysis for Saksoft
Above you can see how the current ROCE for Saksoft 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 Saksoft here for free.
What Does the ROCE Trend For Saksoft Tell Us?
Saksoft deserves to be commended in regards to it's returns. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 58% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
In Conclusion...
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. In light of this, the stock has only gained 11% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One more thing, we've spotted 1 warning sign facing Saksoft that you might find interesting.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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About NSEI:SAKSOFT
Saksoft
An information technology company, provides digital transformation solutions in Europe, the United States, the Asia Pacific, and internationally.
Flawless balance sheet established dividend payer.
