If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in EverCommerce's (NASDAQ:EVCM) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 EverCommerce:

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

0.021 = US$29m ÷ (US$1.5b - US$109m) (Based on the trailing twelve months to September 2024).

Thus, EverCommerce has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 8.6%.

Check out our latest analysis for EverCommerce

In the above chart we have measured EverCommerce's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EverCommerce for free.

So How Is EverCommerce's ROCE Trending?

We're delighted to see that EverCommerce is reaping rewards from its investments and has now broken into profitability. The company now earns 2.1% on its capital, because four years ago it was incurring losses. While returns have increased, the amount of capital employed by EverCommerce has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

What We Can Learn From EverCommerce's ROCE

To sum it up, EverCommerce is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last three years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

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

While EverCommerce 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.