What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at NetSol Technologies (NASDAQ:NTWK) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for NetSol Technologies:

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

0.087 = US$3.5m ÷ (US$64m - US$24m) (Based on the trailing twelve months to June 2024).

Therefore, NetSol Technologies has an ROCE of 8.7%. On its own, that's a low figure but it's around the 8.5% average generated by the Software industry.

See our latest analysis for NetSol Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for NetSol Technologies' ROCE against it's prior returns. If you'd like to look at how NetSol Technologies has performed in the past in other metrics, you can view this free graph of NetSol Technologies' past earnings, revenue and cash flow.

What Can We Tell From NetSol Technologies' ROCE Trend?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 40% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 37% of total assets, this reported ROCE would probably be less than8.7% because total capital employed would be higher.The 8.7% ROCE could be even lower if current liabilities weren't 37% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

In Conclusion...

It's a shame to see that NetSol Technologies is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think NetSol Technologies has the makings of a multi-bagger.

If you want to continue researching NetSol Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.