Axway Software (EPA:AXW) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Axway Software (EPA:AXW), we weren't too hopeful.

Understanding 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. To calculate this metric for Axway Software, this is the formula:

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

0.032 = €16m ÷ (€620m - €126m) (Based on the trailing twelve months to June 2022).

Thus, Axway Software has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Software industry average of 11%.

Check out our latest analysis for Axway Software

Above you can see how the current ROCE for Axway Software 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Axway Software Tell Us?

In terms of Axway Software's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Axway Software to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Axway Software is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 0.2% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Axway Software you'll probably want to know about.

While Axway Software 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.