If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Blackbaud (NASDAQ:BLKB), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Blackbaud, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$83m ÷ (US$2.6b - US$938m) (Based on the trailing twelve months to September 2023).
So, Blackbaud has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.7%.
See our latest analysis for Blackbaud
In the above chart we have measured Blackbaud'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 Blackbaud here for free.
So How Is Blackbaud's ROCE Trending?
When we looked at the ROCE trend at Blackbaud, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.3% over the last five years. However it looks like Blackbaud might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Blackbaud's ROCE
To conclude, we've found that Blackbaud is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing: We've identified 2 warning signs with Blackbaud (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
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.