Will the Promising Trends At NetSol Technologies (NASDAQ:NTWK) Continue?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at NetSol Technologies (NASDAQ:NTWK) and its trend of ROCE, we really liked what we saw.

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 NetSol Technologies is:

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

0.03 = US$1.9m ÷ (US$85m - US$22m) (Based on the trailing twelve months to December 2020).

Thus, NetSol Technologies has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Software industry average of 11%.

Check out our latest analysis for NetSol Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for NetSol Technologies' ROCE against it's prior returns. If you'd like to look at how NetSol Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is NetSol Technologies' ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at NetSol Technologies promising. The figures show that over the last five years, ROCE has grown 1,195% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 25% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From NetSol Technologies' ROCE

In summary, we're delighted to see that NetSol Technologies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 33% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching NetSol Technologies, you might be interested to know about the 2 warning signs that our analysis has discovered.

While NetSol Technologies 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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