Spir Group's (OB:SPIR) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Spir Group (OB:SPIR) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Spir Group, this is the formula:

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

0.037 = kr63m ÷ (kr2.2b - kr472m) (Based on the trailing twelve months to June 2024).

So, Spir Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Software industry average of 14%.

Check out our latest analysis for Spir Group

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Spir Group.

So How Is Spir Group's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 3.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 27% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Spir Group has. Astute investors may have an opportunity here because the stock has declined 65% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 2 warning signs for Spir Group (1 is a bit unpleasant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.