Yahoo Finance Enghouse Systems (TSE:ENGH) Might Become A Compounding Machine
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Enghouse Systems (TSE:ENGH) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding 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 Enghouse Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$98m ÷ (CA$670m - CA$171m) (Based on the trailing twelve months to July 2022).
Therefore, Enghouse Systems has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.1% earned by companies in a similar industry.
See our latest analysis for Enghouse Systems
Above you can see how the current ROCE for Enghouse Systems 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 report for Enghouse Systems.
So How Is Enghouse Systems' ROCE Trending?
We'd be pretty happy with returns on capital like Enghouse Systems. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 58% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
In Conclusion...
In summary, we're delighted to see that Enghouse Systems has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock has only delivered a 24% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
While Enghouse Systems looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ENGH is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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