The Returns On Capital At Apollo Micro Systems (NSE:APOLLO) Don't Inspire Confidence

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Apollo Micro Systems (NSE:APOLLO) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Apollo Micro Systems is:

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

0.089 = ₹279m ÷ (₹5.1b - ₹2.0b) (Based on the trailing twelve months to December 2020).

So, Apollo Micro Systems has an ROCE of 8.9%. Even though it's in line with the industry average of 8.9%, it's still a low return by itself.

See our latest analysis for Apollo Micro Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Apollo Micro Systems' ROCE against it's prior returns. If you're interested in investigating Apollo Micro Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Apollo Micro Systems' ROCE Trend?

On the surface, the trend of ROCE at Apollo Micro Systems doesn't inspire confidence. To be more specific, ROCE has fallen from 32% over the last five years. 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.

On a related note, Apollo Micro Systems has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Apollo Micro Systems' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Apollo Micro Systems have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 59% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Apollo Micro Systems (of which 1 makes us a bit uncomfortable!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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