The Return Trends At Subex (NSE:SUBEXLTD) Look Promising

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Subex (NSE:SUBEXLTD) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Subex is:

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

0.15 = ₹954m ÷ (₹7.3b - ₹967m) (Based on the trailing twelve months to March 2021).

So, Subex has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Software industry.

View our latest analysis for Subex

Historical performance is a great place to start when researching a stock so above you can see the gauge for Subex's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Subex, check out these free graphs here.

So How Is Subex's ROCE Trending?

Subex is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 74% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, Subex has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Subex has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Subex's ROCE

To bring it all together, Subex has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 380% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Subex does come with some risks, and we've found 3 warning signs that you should be aware of.

While Subex may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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