What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Softronic (STO:SOF B), it does have a high ROCE right now, but lets see how returns are trending.
What Is 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 Softronic is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = kr83m ÷ (kr473m - kr167m) (Based on the trailing twelve months to March 2023).
Thus, Softronic has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 19% earned by companies in a similar industry.
View our latest analysis for Softronic
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'd like to look at how Softronic has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
SWOT Analysis for Softronic
- Currently debt free.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Trading below our estimate of fair value by more than 20%.
- Lack of analyst coverage makes it difficult to determine SOF B's earnings prospects.
- No apparent threats visible for SOF B.
How Are Returns Trending?
Over the past five years, Softronic's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.
What We Can Learn From Softronic's ROCE
In summary, Softronic isn't compounding its earnings but is generating decent returns on the same amount of capital employed. And with the stock having returned a mere 5.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Softronic, we've discovered 2 warning signs that you should be aware of.
Softronic is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
About OM:SOF B
Outstanding track record with flawless balance sheet and pays a dividend.
