SPS Commerce (NASDAQ:SPSC) Might Have The Makings Of A Multi-Bagger
What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in SPS Commerce's (NASDAQ:SPSC) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for SPS Commerce, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$71m ÷ (US$673m - US$111m) (Based on the trailing twelve months to December 2022).
Thus, SPS Commerce has an ROCE of 13%. 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 SPS Commerce
In the above chart we have measured SPS Commerce's 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 SPS Commerce here for free.
The Trend Of ROCE
We like the trends that we're seeing from SPS Commerce. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 90% more capital is being employed now too. So we're very much inspired by what we're seeing at SPS Commerce thanks to its ability to profitably reinvest capital.
In Conclusion...
In summary, it's great to see that SPS Commerce can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 351% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
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.
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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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