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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over SPS Commerce’s (NASDAQ:SPSC) trend of ROCE, we liked what we saw.
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)
0.10 = US$87m ÷ (US$1.0b – US$146m) (Based on the trailing twelve months to September 2024).
Therefore, SPS Commerce has an ROCE of 10%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Software industry average of 8.8%.
View our latest analysis for SPS Commerce
Above you can see how the current ROCE for SPS Commerce compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free analyst report for SPS Commerce .
While the returns on capital are good, they haven’t moved much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 134% in that time. Since 10% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The main thing to remember is that SPS Commerce has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 232% return to those who’ve held over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
One more thing to note, we’ve identified 1 warning sign with SPS Commerce and understanding it should be part of your investment process.
While SPS Commerce isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
