SoftTech Engineers (NSE:SOFTTECH) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at SoftTech Engineers (NSE:SOFTTECH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 SoftTech Engineers, this is the formula:

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

0.058 = ₹78m ÷ (₹1.8b - ₹478m) (Based on the trailing twelve months to December 2023).

Therefore, SoftTech Engineers has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.

See 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 SoftTech Engineers' past earnings, revenue and cash flow.

What Can We Tell From SoftTech Engineers' ROCE Trend?

On the surface, the trend of ROCE at SoftTech Engineers doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take 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 long term investors must be optimistic going forward because the stock has returned a huge 463% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about SoftTech Engineers, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.

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.