There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 SolarWinds' (NYSE:SWI) returns on capital, so let's have a look.
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 SolarWinds is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$140m ÷ (US$3.2b - US$430m) (Based on the trailing twelve months to March 2023).
Thus, SolarWinds has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10%.
Check out our latest analysis for SolarWinds
Above you can see how the current ROCE for SolarWinds compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SolarWinds.
The Trend Of ROCE
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 190%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 44% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On SolarWinds' ROCE
In a nutshell, we're pleased to see that SolarWinds has been able to generate higher returns from less capital. Given the stock has declined 44% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching SolarWinds, you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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 NYSE:SWI
SolarWinds
Provides information technology (IT) management software products in the United States and internationally.
Moderate growth potential with acceptable track record.
