Investors Shouldn't Overlook The Favourable Returns On Capital At Saksoft (NSE:SAKSOFT)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Saksoft, this is the formula:

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

0.22 = ₹1.2b ÷ (₹7.9b - ₹2.2b) (Based on the trailing twelve months to March 2024).

Thus, Saksoft has an ROCE of 22%. In absolute terms that's a great return and it's even better than the IT industry average of 15%.

See our latest analysis for Saksoft

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

What Does the ROCE Trend For Saksoft Tell Us?

In terms of Saksoft's history of ROCE, it's quite impressive. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 165% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

What We Can Learn From Saksoft's ROCE

In summary, we're delighted to see that Saksoft has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 1,078% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for SAKSOFT that compares the share price and estimated value.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.

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