Capital Investment Trends At Aspen Technology (NASDAQ:AZPN) Look Strong

By
Simply Wall St
Published
November 25, 2021
NasdaqGS:AZPN
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Ergo, when we looked at the ROCE trends at Aspen Technology (NASDAQ:AZPN), we liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Aspen Technology:

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

0.33 = US$371m ÷ (US$1.3b - US$180m) (Based on the trailing twelve months to September 2021).

Therefore, Aspen Technology has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Software industry average of 11%.

Check out our latest analysis for Aspen Technology

roce
NasdaqGS:AZPN Return on Capital Employed November 26th 2021

In the above chart we have measured Aspen Technology's 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 Aspen Technology.

What Can We Tell From Aspen Technology's ROCE Trend?

In terms of Aspen Technology's history of ROCE, it's quite impressive. The company has consistently earned 33% for the last three years, and the capital employed within the business has risen 72% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Aspen Technology has done well to reduce current liabilities to 14% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 187% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Aspen Technology looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AZPN is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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