Investors Will Want SolarWinds' (NYSE:SWI) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, SolarWinds (NYSE:SWI) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for SolarWinds, this is the formula:

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

0.078 = US$206m ÷ (US$3.1b - US$457m) (Based on the trailing twelve months to September 2024).

Thus, SolarWinds has an ROCE of 7.8%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

View our latest analysis for SolarWinds

In the above chart we have measured SolarWinds' 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 analyst report for SolarWinds .

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at SolarWinds. We found that the returns on capital employed over the last five years have risen by 170%. The company is now earning US$0.08 per dollar of capital employed. In regards to capital employed, SolarWinds appears to been achieving more with less, since the business is using 44% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On SolarWinds' ROCE

In the end, SolarWinds has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 19% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about SolarWinds, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While SolarWinds 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.