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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Simulations Plus (NASDAQ:SLP) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for Simulations Plus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$8.7m ÷ (US$197m - US$12m) (Based on the trailing twelve months to August 2024).
Thus, Simulations Plus has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 6.8%.
Check out our latest analysis for Simulations Plus
Above you can see how the current ROCE for Simulations Plus 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 Simulations Plus for free.
What Can We Tell From Simulations Plus' ROCE Trend?
In terms of Simulations Plus' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.7% from 26% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Simulations Plus' ROCE
While returns have fallen for Simulations Plus in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
While Simulations Plus doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for SLP on our platform.