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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Fabasoft's (ETR:FAA) look very promising so lets take a look.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Fabasoft is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = €13m ÷ (€76m - €34m) (Based on the trailing twelve months to June 2024).
Therefore, Fabasoft has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
Check out our latest analysis for Fabasoft
In the above chart we have measured Fabasoft's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fabasoft for free.
What Can We Tell From Fabasoft's ROCE Trend?
Fabasoft's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 21% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Bottom Line On Fabasoft's ROCE
As discussed above, Fabasoft appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.