There Are Reasons To Feel Uneasy About SoftTech Engineers' (NSE:SOFTTECH) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 investigating SoftTech Engineers (NSE:SOFTTECH), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for SoftTech Engineers:

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

0.087 = ₹91m ÷ (₹1.4b - ₹390m) (Based on the trailing twelve months to December 2022).

Therefore, SoftTech Engineers has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 15%.

Check out our latest analysis for SoftTech Engineers

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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?

We weren't thrilled with the trend because SoftTech Engineers' ROCE has reduced by 67% over the last five years, while the business employed 150% more capital. Usually this isn't ideal, but given SoftTech Engineers conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. SoftTech Engineers probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

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 274% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing SoftTech Engineers we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.