If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in SPS Commerce's (NASDAQ:SPSC) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for SPS Commerce:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$72m ÷ (US$736m - US$112m) (Based on the trailing twelve months to June 2023).
Therefore, SPS Commerce has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Software industry.
View our latest analysis for SPS Commerce
Above you can see how the current ROCE for SPS Commerce compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SPS Commerce here for free.
So How Is SPS Commerce's ROCE Trending?
We like the trends that we're seeing from SPS Commerce. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 106%. So we're very much inspired by what we're seeing at SPS Commerce thanks to its ability to profitably reinvest capital.
The Bottom Line On SPS Commerce's ROCE
To sum it up, SPS Commerce 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
While SPS Commerce 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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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.
About NasdaqGS:SPSC
SPS Commerce
Provides cloud-based supply chain management solutions in the United States and internationally.
Flawless balance sheet with solid track record.
