If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Informatica (NYSE:INFA) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Informatica, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$104m ÷ (US$5.1b - US$897m) (Based on the trailing twelve months to March 2024).
Therefore, Informatica has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Software industry average of 7.2%.
In the above chart we have measured Informatica'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 Informatica for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Informatica is reaping rewards from its investments and has now broken into profitability. The company now earns 2.5% on its capital, because four years ago it was incurring losses. While returns have increased, the amount of capital employed by Informatica has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line
In summary, we're delighted to see that Informatica has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 96% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 2 warning signs with Informatica and understanding them should be part of your investment process.
While Informatica may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.