Yahoo Finance Here's What To Make Of Alfa Financial Software Holdings' (LON:ALFA) Decelerating Rates Of Return
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. Having said that, while the ROCE is currently high for Alfa Financial Software Holdings (LON:ALFA), we aren't jumping out of our chairs because returns are decreasing.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Alfa Financial Software Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = UK£25m ÷ (UK£112m - UK£32m) (Based on the trailing twelve months to June 2021).
So, Alfa Financial Software Holdings has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Software industry average of 8.6%.
See our latest analysis for Alfa Financial Software Holdings
Above you can see how the current ROCE for Alfa Financial Software Holdings 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 Alfa Financial Software Holdings.
What The Trend Of ROCE Can Tell Us
Over the past five years, Alfa Financial Software Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.
The Key Takeaway
In summary, Alfa Financial Software Holdings isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 39% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Alfa Financial Software Holdings does have some risks though, and we've spotted 1 warning sign for Alfa Financial Software Holdings that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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