If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So, when we ran our eye over Sourcesense's (BIT:SOU) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Sourcesense:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = €1.9m ÷ (€19m - €7.8m) (Based on the trailing twelve months to December 2021).
Therefore, Sourcesense has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the IT industry.
Above you can see how the current ROCE for Sourcesense compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sourcesense here for free.
What Can We Tell From Sourcesense's ROCE Trend?
While the returns on capital are good, they haven't moved much. The company has employed 256% more capital in the last three years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Sourcesense has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Sourcesense has done well to reduce current liabilities to 41% of total assets over the last three years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.
Our Take On Sourcesense's ROCE
The main thing to remember is that Sourcesense has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 29% to shareholders over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you want to continue researching Sourcesense, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Sourcesense 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.