What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Blackbaud (NASDAQ:BLKB), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Blackbaud is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = US$46m ÷ (US$1.7b - US$646m) (Based on the trailing twelve months to March 2021).
So, Blackbaud has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Software industry average of 11%.
In the above chart we have measured Blackbaud'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 Blackbaud.
The Trend Of ROCE
When we looked at the ROCE trend at Blackbaud, we didn't gain much confidence. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 4.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Blackbaud's ROCE
To conclude, we've found that Blackbaud is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 7.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Blackbaud does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
While Blackbaud isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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