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Sage Group's (LON:SGE) Returns On Capital Not Reflecting Well On The Business

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sage Group (LON:SGE), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Sage Group is:

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

0.19 = UK£519m ÷ (UK£3.7b - UK£1.0b) (Based on the trailing twelve months to September 2020).

Therefore, Sage Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Software industry.

See our latest analysis for Sage Group

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Above you can see how the current ROCE for Sage 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 report for Sage Group.

So How Is Sage Group's ROCE Trending?

We weren't thrilled with the trend because Sage Group's ROCE has reduced by 22% over the last five years, while the business employed 83% more capital. That being said, Sage Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sage Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

To conclude, we've found that Sage Group is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing: We've identified 3 warning signs with Sage Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Sage Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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