If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at SoftwareONE Holding (VTX:SWON), it didn't seem to tick all of these boxes.

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. To calculate this metric for SoftwareONE Holding, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = CHF132m ÷ (CHF3.7b - CHF2.7b) (Based on the trailing twelve months to June 2022).

So, SoftwareONE Holding has an ROCE of 14%. In isolation, that's a pretty standard return but against the Electronic industry average of 19%, it's not as good.

See our latest analysis for SoftwareONE Holding

Above you can see how the current ROCE for SoftwareONE Holding 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 report for SoftwareONE Holding.

What Can We Tell From SoftwareONE Holding's ROCE Trend?

In terms of SoftwareONE Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, SoftwareONE Holding's current liabilities are still rather high at 74% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From SoftwareONE Holding's ROCE

While returns have fallen for SoftwareONE Holding in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 43% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.