ePlus' (NASDAQ:PLUS) Returns Have Hit A Wall
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over ePlus' (NASDAQ:PLUS) trend of ROCE, we liked what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ePlus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$131m ÷ (US$1.1b - US$476m) (Based on the trailing twelve months to September 2021).
So, ePlus has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Electronic industry.
Check out our latest analysis for ePlus
In the above chart we have measured ePlus' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ePlus here for free.
So How Is ePlus' ROCE Trending?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 95% more capital into its operations. 20% is a pretty standard return, and it provides some comfort knowing that ePlus has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, ePlus' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On ePlus' ROCE
The main thing to remember is that ePlus has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 63% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you'd like to know about the risks facing ePlus, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
