Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Hansen Technologies (ASX:HSN) 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 Hansen Technologies, this is the formula:

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

0.093 = AU$42m ÷ (AU$567m - AU$109m) (Based on the trailing twelve months to June 2024).

Therefore, Hansen Technologies has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Software industry average of 9.8%.

See our latest analysis for Hansen Technologies

In the above chart we have measured Hansen Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hansen Technologies .

What Does the ROCE Trend For Hansen Technologies Tell Us?

Hansen Technologies has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 46% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

As discussed above, Hansen Technologies appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 79% return over the last five years. In light of that, we think it's worth looking further into this stock because if Hansen Technologies can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Hansen Technologies that you might find interesting.

While Hansen Technologies 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.