Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That’s why when we briefly looked at Oracle Financial Services Software’s (NSE:OFSS) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Oracle Financial Services Software, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.35 = ₹23b ÷ (₹74b – ₹8.8b) (Based on the trailing twelve months to September 2020).
Therefore, Oracle Financial Services Software has an ROCE of 35%. In absolute terms that’s a great return and it’s even better than the Software industry average of 12%.
View our latest analysis for Oracle Financial Services Software
In the above chart we have measured Oracle Financial Services 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 report for Oracle Financial Services Software.
The Trend Of ROCE
We’d be pretty happy with returns on capital like Oracle Financial Services Software. Over the past five years, ROCE has remained relatively flat at around 35% and the business has deployed 52% more capital into its operations. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
The Key Takeaway
In the end, the company has proven it can reinvest it’s capital at high rates of returns, which you’ll remember is a trait of a multi-bagger. However, over the last five years, the stock has only delivered a 12% return to shareholders who held over that period. So to determine if Oracle Financial Services Software is a multi-bagger going forward, we’d suggest digging deeper into the company’s other fundamentals.
On a final note, we’ve found 2 warning signs for Oracle Financial Services Software that we think you should be aware of.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
If you decide to trade Oracle Financial Services Software, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.