What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at SPS Commerce (NASDAQ:SPSC) so let's look a bit deeper.
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. Analysts use this formula to calculate it for SPS Commerce:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$44m ÷ (US$462m - US$67m) (Based on the trailing twelve months to June 2020).
Therefore, SPS Commerce has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Software industry.
Above you can see how the current ROCE for SPS Commerce compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From SPS Commerce's ROCE Trend?
We like the trends that we're seeing from SPS Commerce. Over the last five years, returns on capital employed have risen substantially to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 75%. So we're very much inspired by what we're seeing at SPS Commerce thanks to its ability to profitably reinvest capital.
Our Take On SPS Commerce's ROCE
All in all, it's terrific to see that SPS Commerce is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While SPS Commerce looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether SPSC is currently trading for a fair price.
While SPS Commerce isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
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