If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. So when we looked Hybrid Software Group (EBR:HYSG) and its ROCE trend, we really liked what we saw.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on Hybrid Software Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.022 = €2.9m ÷ (€148m – €17m) (Based on the last twelve months to June 2022).
So, Hybrid Software Group posted a ROCE of 2.2%. In absolute terms, that’s a low return, and it’s also below the software industry average of 11%.
Check out our latest analysis for Hybrid Software Group
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive into Hybrid Software Group’s earnings, revenue, and cash flow history, check out these free graphics here.
So, what is the Hybrid Software Group’s ROCE trend?
Hybrid Software Group recently achieved profitability, so its earlier investments appear to be paying off. Shareholders would no doubt rejoice because the company was loss-making five years ago but now generates 2.2% of its capital. On top of that, Hybrid Software Group employs 442% more capital than before, which is expected of a company trying to become profitable. We like this trend because it tells us that the company has profitable reinvestment opportunities, and if it continues, it can lead to multi-bagger performance.
ROCE of our hybrid software group
To the delight of most shareholders, Hybrid Software Group is now profitable. And investors seem to expect more in the future, as the stock has rewarded shareholders with a 46% return over the past five years. That being said, we still think the promising fundamentals mean the company merits further due diligence.
However, Hybrid Software Group presents certain risks, and we have identified 1 warning sign for Hybrid Software Group that might interest you.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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