Under The Bonnet, AppFolio's (NASDAQ:APPF) Returns Look Impressive

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at AppFolio's (NASDAQ:APPF) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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

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

0.24 = US$136m ÷ (US$627m - US$63m) (Based on the trailing twelve months to December 2024).

Therefore, AppFolio has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Software industry average of 8.3%.

View our latest analysis for AppFolio

Above you can see how the current ROCE for AppFolio compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AppFolio for free.

The Trend Of ROCE

We like the trends that we're seeing from AppFolio. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. The amount of capital employed has increased too, by 165%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

In summary, it's great to see that AppFolio 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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 68% return over the last five years. In light of that, we think it's worth looking further into this stock because if AppFolio can keep these trends up, it could have a bright future ahead.

AppFolio does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

AppFolio 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.