Here's What's Concerning About SoftTech Engineers' (NSE:SOFTTECH) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think SoftTech Engineers (NSE:SOFTTECH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SoftTech Engineers:

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

0.066 = ₹89m ÷ (₹1.8b - ₹478m) (Based on the trailing twelve months to September 2023).

Thus, SoftTech Engineers has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.

View our latest analysis for SoftTech Engineers

Historical performance is a great place to start when researching a stock so above you can see the gauge for SoftTech Engineers' ROCE against it's prior returns. If you'd like to look at how SoftTech Engineers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For SoftTech Engineers Tell Us?

On the surface, the trend of ROCE at SoftTech Engineers doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.6% from 21% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On SoftTech Engineers' ROCE

While returns have fallen for SoftTech Engineers in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 444% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 5 warning signs with SoftTech Engineers (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

While SoftTech Engineers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.