What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. That's why when we briefly looked at Alfa Financial Software Holdings' (LON:ALFA) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.48 = UK£28m ÷ (UK£85m - UK£28m) (Based on the trailing twelve months to June 2022).

Therefore, Alfa Financial Software Holdings has an ROCE of 48%. In absolute terms that's a great return and it's even better than the Software industry average of 9.0%.

View our latest analysis for Alfa Financial Software Holdings  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're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

What Does the ROCE Trend For Alfa Financial Software Holdings Tell Us?

Alfa Financial Software Holdings deserves to be commended in regards to it's returns. The company has consistently earned 48% for the last five years, and the capital employed within the business has risen 49% in that time. Now considering ROCE is an attractive 48%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Alfa Financial Software Holdings can keep this up, we'd be very optimistic about its future.



One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 33% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

Alfa Financial Software Holdings has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Yet over the last five years the stock has declined 55%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Alfa Financial Software Holdings does have some risks though, and we've spotted  1 warning sign for Alfa Financial Software Holdings that you might be interested in.

If you'd like to see other companies earning high returns, check out our freelist of companies earning high returns with solid balance sheets here.

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

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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