If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Dropsuite (ASX:DSE) so let's look a bit deeper.
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 Dropsuite:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = AU$356k ÷ (AU$33m - AU$4.1m) (Based on the trailing twelve months to June 2024).
Therefore, Dropsuite has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.
See our latest analysis for Dropsuite
In the above chart we have measured Dropsuite's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Dropsuite .
The fact that Dropsuite is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. Not only that, but the company is utilizing 704% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Long story short, we're delighted to see that Dropsuite's reinvestment activities have paid off and the company is now profitable. And a remarkable 875% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Dropsuite does have some risks though, and we've spotted 1 warning sign for Dropsuite that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.