Is SoftBlue (WSE:SBE) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at SoftBlue (WSE:SBE) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for SoftBlue, this is the formula:

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

0.016 = zł756k ÷ (zł59m - zł13m) (Based on the trailing twelve months to December 2020).

Therefore, SoftBlue has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

Check out our latest analysis for SoftBlue

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, revenue and cash flow of SoftBlue, check out these free graphs here.

What Does the ROCE Trend For SoftBlue Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 1.6%. The amount of capital employed has increased too, by 308%. So we're very much inspired by what we're seeing at SoftBlue thanks to its ability to profitably reinvest capital.

What We Can Learn From SoftBlue's ROCE

In summary, it's great to see that SoftBlue can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if SoftBlue can keep these trends up, it could have a bright future ahead.

SoftBlue does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those are concerning...

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. 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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