Capital investment trends at Technology One (ASX:TNE) look solid
If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. Therefore, when we briefly examined One Technology (ASX:TNE) ROCE trend, we were very pleased with what we saw.
Understanding return on capital employed (ROCE)
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Technology One, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.45 = AU$104 million ÷ (AU$432 million – AU$199 million) (Based on the last twelve months to March 2022).
Thereby, Technology One posts a ROCE of 45%. In absolute terms, this is an excellent performance and is even better than the software industry average of 11%.
Check out our latest analysis for Technology One
In the chart above, we measured Technology One’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Technology One.
The ROCE trend
In terms of Technology One’s ROCE history, that’s pretty impressive. The company has employed 64% more capital over the past five years, and the return on that capital has remained stable at 45%. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. You will see this when you look at well-run businesses or favorable business models.
On another note, while the change in ROCE trend may not attract attention, it is interesting to note that current liabilities have actually increased over the past five years. This is intriguing because if current liabilities had not increased to 46% of total assets, this reported ROCE would likely be less than 45% because total capital employed would be higher. The ROCE of 45% could be even lower if current liabilities were not 46% of total assets, as the formula would show a larger base of total capital employed. Moreover, this high level of short-term liabilities is not ideal because it means that the company’s suppliers (or short-term creditors) are effectively financing a large part of the activity.
Technology One’s ROCE Basics
Technology One has a proven track record of delivering high returns on increasing amounts of capital employed, which we are delighted about. So it’s no surprise that shareholders have earned a respectable 92% return if they’ve held for the past five years. So while the positive underlying trends can be explained by investors, we still think this stock deserves further investigation.
On the other side of ROCE, we have to consider valuation. That’s why we have a FREE intrinsic value estimation on our platform definitely worth checking out.
Technology One is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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