There's Been No Shortage Of Growth Recently For SolarWinds' (NYSE:SWI) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at SolarWinds (NYSE:SWI) so let's look a bit deeper.

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. The formula for this calculation on SolarWinds is:

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

0.06 = US$167m ÷ (US$3.3b - US$469m) (Based on the trailing twelve months to December 2023).

So, SolarWinds has an ROCE of 6.0%. On its own, that's a low figure but it's around the 7.2% average generated by the Software industry.

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're interested, you can view the analysts predictions in 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. The figures show that over the last five years, returns on capital have grown by 143%. The company is now earning US$0.06 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 42% less capital than it was five years ago. SolarWinds may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In summary, it's great to see that SolarWinds has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 1 warning sign for SolarWinds you'll probably want to know about.

While SolarWinds 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.