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Our Take On The Returns On Capital At Alfa Financial Software Holdings (LON:ALFA)

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Simply Wall St
·3 min read
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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Alfa Financial Software Holdings (LON:ALFA), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Alfa Financial Software Holdings is:

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

0.17 = UK£19m ÷ (UK£133m - UK£25m) (Based on the trailing twelve months to June 2020).

Thus, Alfa Financial Software Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Software industry.

See our latest analysis for Alfa Financial Software Holdings

roce
roce

In the above chart we have measured Alfa Financial Software Holdings' 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 Alfa Financial Software Holdings here for free.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 38% five years ago, while capital employed has grown 102%. Usually this isn't ideal, but given Alfa Financial Software Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Alfa Financial Software Holdings might not have received a full period of earnings contribution from it. Additionally, we found that Alfa Financial Software Holdings' most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

In Conclusion...

To conclude, we've found that Alfa Financial Software Holdings is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 70% over the last three years, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Alfa Financial Software Holdings (including 1 which is shouldn't be ignored) .

While Alfa Financial Software Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

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