What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Piesat Information Technology (SHSE:688066) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Piesat Information Technology:

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

0.07 = CN¥174m ÷ (CN¥3.5b - CN¥981m) (Based on the trailing twelve months to March 2022).

Thus, Piesat Information Technology has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.0% generated by the Software industry, it's much better.

View our latest analysis for Piesat Information Technology

In the above chart we have measured Piesat Information Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Piesat Information Technology.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 16% five years ago, while capital employed has grown 814%. Usually this isn't ideal, but given Piesat Information Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Piesat Information Technology's earnings and if they change as a result from the capital raise.

Our Take On Piesat Information Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Piesat Information Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 60% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Piesat Information Technology does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.