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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Beta Systems Software's (FRA:BSS) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Beta Systems Software is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = €7.9m ÷ (€64m - €31m) (Based on the trailing twelve months to September 2023).
So, Beta Systems Software has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Software industry average of 14%.
See 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 .
What Can We Tell From Beta Systems Software's ROCE Trend?
Beta Systems Software has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 172% over the trailing five years. The company is now earning €0.2 per dollar of capital employed. In regards to capital employed, Beta Systems Software appears to been achieving more with less, since the business is using 33% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 48% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
Our Take On Beta Systems Software's ROCE
In summary, it's great to see that Beta Systems Software has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 90% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.