What Do The Returns On Capital At Apollo Micro Systems (NSE:APOLLO) Tell Us?

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. 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 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 Apollo Micro Systems is:

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

0.13 = ₹388m ÷ (₹4.7b - ₹1.6b) (Based on the trailing twelve months to March 2020).

Thus, Apollo Micro Systems has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Aerospace & Defense industry average it falls behind.

Check out our latest analysis for Apollo Micro Systems

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 want to delve into the historical earnings, revenue and cash flow of Apollo Micro Systems, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Apollo Micro Systems, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 13%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Apollo Micro Systems has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Apollo Micro Systems' ROCE

To conclude, we've found that Apollo Micro Systems is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 65% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 3 warning signs for Apollo Micro Systems you'll probably want to know about.

While Apollo Micro Systems 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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