To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Saksoft's (NSE:SAKSOFT) trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 June 2024).
Therefore, 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?
It's hard not to be impressed by Saksoft's returns on capital. 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. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
The Key Takeaway
In short, we'd argue Saksoft has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 1,209% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Saksoft does have some risks though, and we've spotted 1 warning sign for Saksoft that you might be interested in.
Saksoft 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.
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.
