SilverSun Technologies (NASDAQ:SSNT) Might Have The Makings Of A Multi-Bagger

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at SilverSun Technologies (NASDAQ:SSNT) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for SilverSun Technologies, this is the formula:

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

0.048 = US$539k ÷ (US$21m - US$9.5m) (Based on the trailing twelve months to June 2023).

Therefore, SilverSun Technologies has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Software industry average of 9.4%.

Check out our latest analysis for SilverSun Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating SilverSun Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that SilverSun Technologies is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.8% on its capital. Not only that, but the company is utilizing 91% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that SilverSun Technologies has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Overall, SilverSun Technologies gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

SilverSun Technologies does have some risks though, and we've spotted 2 warning signs for SilverSun Technologies that you might be interested in.

While SilverSun Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.