Agilysys (NASDAQ:AGYS) Might Have The Makings Of A Multi-Bagger

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Agilysys (NASDAQ:AGYS) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Agilysys, this is the formula:

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

0.069 = US$13m ÷ (US$255m - US$73m) (Based on the trailing twelve months to September 2023).

Therefore, Agilysys has an ROCE of 6.9%. On its own, that's a low figure but it's around the 7.7% average generated by the Software industry.

Check out our latest analysis for Agilysys

In the above chart we have measured Agilysys' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Agilysys.

So How Is Agilysys' ROCE Trending?

The fact that Agilysys 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 6.9% which is a sight for sore eyes. In addition to that, Agilysys is employing 65% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Agilysys' ROCE

Long story short, we're delighted to see that Agilysys' reinvestment activities have paid off and the company is now profitable. And a remarkable 459% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for Agilysys that we think you should be aware of.

While Agilysys 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.