Sonata Software (NSE: SONATSOFTW) aims to maintain impressive returns
What trends should we look for if we are to identify stocks that can multiply in value over the long term? Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. Basically, it means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a dialing machine. Therefore, when we briefly examined Sonata software (NSE: SONATSOFTW) Trend ROCE, we were very happy with what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Sonata Software is:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.34 = 4.0b Ã· (â¹ 21b – â¹ 9.0b) (Based on the last twelve months up to September 2021).
Thereby, Sonata Software has a ROCE of 34%. In absolute terms, that’s a great return and it’s even better than the IT industry average of 12%.
See our latest review for Sonata Software
Above you can see how Sonata Software’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Sonata Software.
The ROCE trend
It’s hard not to be impressed with the returns on capital from Sonata Software. The company has employed 95% more capital over the past five years, and returns on that capital have remained stable at 34%. With such high returns, it’s great that the company can continually reinvest their money at such attractive rates of return. If Sonata Software can keep up this pace, we would be very optimistic about its future.
On a separate but related note, it’s important to know that Sonata Software has a ratio of current liabilities to total assets of 43%, which we consider to be quite high. This can lead to certain risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease as that would mean less risky bonds.
The essentials on the ROCE of Sonata Software
In the end, the company has proven that it can reinvest its capital at high rates of return, which you will recall is a hallmark of a multi-bagger. And the stock has performed incredibly well with a return of 571% over the past five years, so long-term investors are no doubt thrilled with the result. So while investors seem to recognize these promising trends, we still believe the stock deserves further research.
On a final note, we found 2 warning signs for Sonata software that we think you should be aware of.
If you want to look for more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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