If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Microlise Group (LON:SAAS) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Microlise Group:

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

0.019 = UK￡1.8m ÷ (UK￡133m - UK￡36m) (Based on the trailing twelve months to June 2024).

Thus, Microlise Group has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 10%.

View our latest analysis for Microlise Group

Above you can see how the current ROCE for Microlise Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Microlise Group .

What Does the ROCE Trend For Microlise Group Tell Us?

Shareholders will be relieved that Microlise Group has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.9%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

In Conclusion...

To sum it up, Microlise Group is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 42% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.