Finding a company that has the potential to grow substantially isn’t easy, but it is possible if we look at a few key financial metrics. We want to see two things, among other things; primarily a growing one yield on invested capital (ROCE) and secondly on an expansion of the company quantity of the invested capital. Ultimately, this shows that it is a company that reinvests profits at increasingly higher returns. So when we looked USU software (ETR:OSP2) and the ROCE trend, we really liked what we saw.
Return on Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its rate of return), relative to the capital invested in the company. Analysts use this formula to calculate it for USU Software:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = €10 million ÷ (€113 million – €42 million) (Based on the last twelve months to June 2023).
So, USU Software has a ROCE of 14%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the software industry average of 12%.
Check out our latest analysis for USU Software
Above you can see how the current ROCE for USU Software compares to its past returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can check out the analyst forecasts in our free reporting on analysts’ forecasts for the company.
What can we infer from USU Software’s ROCE trend?
USU Software is promising as its ROCE is trending upward and to the right. More specifically, while the company has kept its invested capital relatively stable over the past five years, its ROCE has increased by 202% in that same time. In fact, the company is generating higher returns from the same amount of capital and that is evidence that there are improvements in the company’s efficiency. In that sense, the company is doing well, and it’s worth examining what the management team has planned for its long-term growth prospects.
The end result of USU Software’s ROCE
In short: USU Software gets higher returns from the same amount of capital, and that is impressive. Because the stock has returned just 1.6% to shareholders over the past five years, its promising fundamentals may not yet be recognized by investors. So researching more about this stock could reveal a good opportunity if its valuation and other metrics stack up.
One more thing to note: we’ve identified it 2 warning signs with USU Software and understanding it should be part of your investment process.
If you want to look for solid companies with great earnings, take a look here free list of companies with good balance sheets and impressive returns on equity.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.
