Keyware Technologies (EBR:KEYW) Will Will Want To Turn Around Its Return Trends

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Keyware Technologies (EBR:KEYW), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Keyware Technologies is:

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

0.0069 = €219k ÷ (€38m - €6.0m) (Based on the trailing twelve months to June 2020).

Thus, Keyware Technologies has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the IT industry average of 13%.

View our latest analysis for Keyware Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Keyware Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Keyware Technologies' ROCE Trend?

On the surface, the trend of ROCE at Keyware Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.7% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Keyware Technologies' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Keyware Technologies does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Keyware Technologies 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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