What are the early trends we should look for to identify a stock that could multiply in value over the long term? First, we’d want to identify a growing returns on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continuously reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Easy Software’s (HMSE:ESY) returns on capital, so let’s have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you’re undecided, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Easy Software, this is the formula:

Return on Employed Capital = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.027 = €641k ÷ (€37m – €13m) (Based on the trailing twelve months to December 2022).

So, Easy Software has an ROCE of 2.7%. In absolute terms, that’s a low return and it also underperforms the Software industry average of 12%.

Check out our latest analysis for Easy Software



Historical performance is a great place to start when researching a stock so above you can see the gauge for Easy Software’s ROCE against it’s prior returns. If you’re interested in investigating Easy Software’s past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Easy Software’s ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at Easy Software promising. The figures show that over the last five years, ROCE has grown 124% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiency. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.

Our Take On Easy Software’s ROCE

To sum it up, Easy Software is collecting higher returns from the same amount of capital, and that’s impressive. Since the stock has returned a solid 17% to shareholders over the last year, it’s fair to say investors are beginning to recognize these changes. In light of that, we think it’s worth looking further into this stock because if Easy Software can keep these trends up, it could have a bright future ahead.

One more thing: We’ve identified 3 warning signs with Easy Software (at least 1 which doesn’t sit too well with us), and understanding them would certainly be useful.

While Easy Software may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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