The Returns At SoftTech Engineers (NSE:SOFTTECH) Provide Us With Signs Of What's To Come

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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 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. The formula for this calculation on SoftTech Engineers is:

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

0.13 = ₹118m ÷ (₹1.1b - ₹204m) (Based on the trailing twelve months to September 2020).

Therefore, SoftTech Engineers has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 12%.

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 want to delve into the historical earnings, revenue and cash flow of SoftTech Engineers, check out these free graphs here.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 18% five years ago, while capital employed has grown 167%. That being said, SoftTech Engineers raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence SoftTech Engineers might not have received a full period of earnings contribution from it.

On a side note, SoftTech Engineers has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On SoftTech Engineers' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for SoftTech Engineers have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 40% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for SoftTech Engineers (of which 2 are concerning!) that you should know about.

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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