The Returns On Capital At Blackbaud (NASDAQ:BLKB) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Blackbaud (NASDAQ:BLKB) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Blackbaud is:

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

0.05 = US$83m ÷ (US$2.6b - US$938m) (Based on the trailing twelve months to September 2023).

So, Blackbaud has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Software industry average of 7.7%.

View our latest analysis for Blackbaud

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.

What Does the ROCE Trend For Blackbaud Tell Us?

On the surface, the trend of ROCE at Blackbaud doesn't inspire confidence. Around five years ago the returns on capital were 9.3%, but since then they've fallen to 5.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Blackbaud's ROCE

Bringing it all together, while we're somewhat encouraged by Blackbaud's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Blackbaud (including 1 which makes us a bit uncomfortable) .

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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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.