Investors Will Want Sapiens International's (NASDAQ:SPNS) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Sapiens International (NASDAQ:SPNS) so let's look a bit deeper.

What Is 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 Sapiens International:

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

0.14 = US$72m ÷ (US$653m - US$141m) (Based on the trailing twelve months to June 2023).

Therefore, Sapiens International has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.9% it's much better.

See our latest analysis for Sapiens International

Above you can see how the current ROCE for Sapiens International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We like the trends that we're seeing from Sapiens International. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 73% more capital is being employed now too. So we're very much inspired by what we're seeing at Sapiens International thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Sapiens International has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing Sapiens International that you might find interesting.

While Sapiens International 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.