Investors Will Want SoftBlue's (WSE:SBE) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in SoftBlue's (WSE:SBE) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SoftBlue is:

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

0.022 = zł1.2m ÷ (zł65m - zł8.5m) (Based on the trailing twelve months to September 2021).

So, SoftBlue has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the IT industry average of 17%.

Check out our latest analysis for SoftBlue

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

What The Trend Of ROCE Can Tell Us

The fact that SoftBlue is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, SoftBlue is utilizing 432% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From SoftBlue's ROCE

In summary, it's great to see that SoftBlue has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 10% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

SoftBlue does have some risks, we noticed 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While SoftBlue 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.