In This Article:
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Agilysys (NASDAQ:AGYS) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Agilysys is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$24m ÷ (US$444m - US$115m) (Based on the trailing twelve months to December 2024).
Therefore, Agilysys has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.7%.
See our latest analysis for Agilysys
Above you can see how the current ROCE for Agilysys 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 analyst report for Agilysys .
What Does the ROCE Trend For Agilysys Tell Us?
We're delighted to see that Agilysys is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.3% on its capital. Not only that, but the company is utilizing 201% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Agilysys has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
In summary, it's great to see that Agilysys has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.