The Returns On Capital At Genesis IT (NGM:GENE) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Genesis IT (NGM:GENE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Genesis IT, this is the formula:

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

0.094 = kr14m ÷ (kr157m - kr13m) (Based on the trailing twelve months to June 2022).

Therefore, Genesis IT has an ROCE of 9.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 13%.

Our analysis indicates that GENE is potentially undervalued!

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're interested in investigating Genesis IT's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Genesis IT's ROCE Trend?

On the surface, the trend of ROCE at Genesis IT doesn't inspire confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 9.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Genesis IT's ROCE

To conclude, we've found that Genesis IT is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last five years. Therefore based on the analysis done in this article, we don't think Genesis IT has the makings of a multi-bagger.

If you want to know some of the risks facing Genesis IT we've found 5 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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.