Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at IDOX (LON:IDOX) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on IDOX is:

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

0.093 = UK£9.3m ÷ (UK£145m - UK£45m) (Based on the trailing twelve months to April 2023).

Therefore, IDOX has an ROCE of 9.3%. On its own, that's a low figure but it's around the 9.8% average generated by the Software industry.

See our latest analysis for IDOX  roce

Above you can see how the current ROCE for IDOX compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The fact that IDOX is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.3% on its capital. In addition to that, IDOX is employing 61% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, IDOX has decreased current liabilities to 31% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that IDOX has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From IDOX's ROCE

Long story short, we're delighted to see that IDOX's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 87% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if IDOX can keep these trends up, it could have a bright future ahead.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our  FREE intrinsic value estimation  that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

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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