Yahoo Finance Microlise Group's (LON:SAAS) Returns Have Hit A Wall
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Microlise Group (LON:SAAS), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Microlise Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = UK£2.6m ÷ (UK£131m - UK£34m) (Based on the trailing twelve months to December 2023).
Thus, Microlise Group has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.4%.
View our latest analysis for Microlise Group
In the above chart we have measured Microlise Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Microlise Group .
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Microlise Group in recent years. The company has consistently earned 2.7% for the last five years, and the capital employed within the business has risen 66% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Microlise Group's ROCE
Long story short, while Microlise Group has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 22% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Microlise Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for SAAS on our platform quite valuable.
While Microlise Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
