SolarWinds (NYSE:SWI) Is Doing The Right Things To Multiply Its Share Price
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at SolarWinds (NYSE:SWI) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for SolarWinds, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = US$161m ÷ (US$3.2b - US$436m) (Based on the trailing twelve months to June 2023).
Therefore, SolarWinds has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Software industry average of 9.2%.
See our latest analysis for SolarWinds
In the above chart we have measured SolarWinds' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We're pretty happy with how the ROCE has been trending at SolarWinds. The figures show that over the last five years, returns on capital have grown by 228%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 43% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
What We Can Learn From SolarWinds' ROCE
In summary, it's great to see that SolarWinds has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 47% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know about the risks facing SolarWinds, we've discovered 2 warning signs that you should be aware of.
While SolarWinds isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.