Embarking on the quest for lucrative investments can be daunting, yet certain pivotal trends serve as valuable indicators. A prevalent tactic involves identifying companies that exhibit a rising return on capital employed (ROCE), coupled with an expanding capital base.
This phenomenon suggests the company functions as a compounding entity, adept at reinvesting profits to yield elevated returns. However, while the ROCE for Sonata Software (NSE: SONATSOFTW) remains commendably high, the diminishing returns temper our enthusiasm.
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Decoding Return On Capital Employed (ROCE)
For those unfamiliar, ROCE quantifies the ‘return’ (pre-tax profit) generated by a company’s capital investment. Analysts employ the following formula to assess Sonata Software’s performance:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.26 = ₹5.6b ÷ (₹48b – ₹26b) (Based on trailing twelve months ending June 2025).
Consequently, Sonata Software boasts an ROCE of 26%. In isolation, this figure represents a commendable return, notably surpassing the IT sector’s average of 17%.
Explore our latest in-depth analysis of Sonata Software NSEI: SONATSOFTW Return on Capital Employed September 14th, 2025
The chart above juxtaposes Sonata Software’s historical ROCE against its prior performance; nonetheless, future projections arguably hold greater significance. To uncover what analysts forecast moving forward, consider reviewing our complimentary analyst report for Sonata Software.
Insights from Sonata Software’s ROCE Trend
Upon examining Sonata Software’s ROCE trajectory, confidence is not readily apparent. Historically, returns on capital peaked at 44%; however, a decline has been evident over the past five years. Notably, both capital employed and revenue have surged, indicating that the company is aggressively pursuing growth, albeit at the expense of short-term returns.
If these strategic investments yield favorable outcomes, the potential for long-term stock appreciation remains promising.
On another note, Sonata Software’s current liabilities represent a significant 55% of total assets. This high ratio introduces certain risks, as it indicates reliance on suppliers or short-term creditors. Ideally, a reduction in this metric would mitigate obligations and reduce associated risks.
Conclusion
Although Sonata Software’s returns have dwindled recently, the encouraging uptick in sales and reinvestment strategies signals potential for future growth. Long-term investors may find solace in the impressive 236% return delivered to shareholders over the past five years.
While market participants acknowledge these favorable trends, further examination is warranted to ensure that other financial metrics corroborate this optimistic outlook.
As a final observation, we have identified one cautionary sign for Sonata Software that warrants attention.
For those in pursuit of equities with impressive returns, peruse this complimentary list of stocks that feature robust balance sheets alongside high returns on equity.
Valuation may seem intricate, yet we strive to clarify.
Discover whether Sonata Software is undervalued or overvalued through our thorough analysis, which includes fair value estimates, risks, dividend information, insider trades, and overall financial health.
This article by RS Web Solutions and Simply Wall St is informational in nature. We present commentary derived from historical data and analyst projections, employing an unbiased methodology. Our articles are not intended as financial advice. This content does not constitute a recommendation to buy or sell any stock and does not account for individual objectives or financial circumstances.
We aim to provide long-term, focused analysis driven by fundamental data. Note that our analysis may not consider the most recent price-sensitive company announcements or qualitative aspects. RS Web Solutions and Simply Wall St hold no positions in any stocks mentioned.
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