Returns On Capital At LSI Software (WSE:LSI) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at LSI Software (WSE:LSI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 LSI Software is:

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

0.068 = zł3.2m ÷ (zł63m - zł16m) (Based on the trailing twelve months to September 2022).

Therefore, LSI Software has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Software industry average of 13%.

View our latest analysis for LSI Software

Historical performance is a great place to start when researching a stock so above you can see the gauge for LSI Software's ROCE against it's prior returns. If you're interested in investigating LSI Software's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From LSI Software's ROCE Trend?

On the surface, the trend of ROCE at LSI Software doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.8% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for LSI Software in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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

While LSI Software 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. 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.