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When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Beta Systems Software (FRA:BSS), so let's see why.
Understanding 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. Analysts use this formula to calculate it for Beta Systems Software:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = €1.4m ÷ (€76m - €24m) (Based on the trailing twelve months to September 2024).
Thus, Beta Systems Software has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.
View our latest analysis for Beta Systems Software
In the above chart we have measured Beta Systems Software's 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 Beta Systems Software .
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Beta Systems Software. Unfortunately the returns on capital have diminished from the 13% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Beta Systems Software to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Beta Systems Software is generating lower returns from the same amount of capital. However the stock has delivered a 64% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we've found 1 warning sign for Beta Systems Software that we think you should be aware of.