If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Fair Isaac (NYSE:FICO) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Fair Isaac:

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

0.50 = US$689m ÷ (US$1.7b - US$315m) (Based on the trailing twelve months to March 2024).

So, Fair Isaac has an ROCE of 50%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

Above you can see how the current ROCE for Fair Isaac 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 free analyst report for Fair Isaac .

What Can We Tell From Fair Isaac's ROCE Trend?

Fair Isaac is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 50%. The amount of capital employed has increased too, by 56%. So we're very much inspired by what we're seeing at Fair Isaac thanks to its ability to profitably reinvest capital.

One more thing to note, Fair Isaac has decreased current liabilities to 19% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

To sum it up, Fair Isaac has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 360% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Fair Isaac can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Fair Isaac and understanding these should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.