In This Article:
There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Fair Isaac (NYSE:FICO) looks great, so lets see what the trend can tell us.
Understanding 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 Fair Isaac is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.45 = US$492m ÷ (US$1.5b - US$383m) (Based on the trailing twelve months to March 2022).
So, Fair Isaac has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Software industry average of 9.9%.
Check out our latest analysis for Fair Isaac
Above you can see how the current ROCE for Fair Isaac compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fair Isaac here for free.
What The Trend Of ROCE Can Tell Us
Fair Isaac is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 150% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Fair Isaac's ROCE
In summary, we're delighted to see that Fair Isaac has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 195% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Fair Isaac can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for Fair Isaac you'll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.