There Are Reasons To Feel Uneasy About Exicom Tele-Systems' (NSE:EXICOM) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 briefly looking over the numbers, we don't think Exicom Tele-Systems (NSE:EXICOM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Exicom Tele-Systems:

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

0.0019 = ₹19m ÷ (₹16b - ₹5.8b) (Based on the trailing twelve months to December 2024).

Therefore, Exicom Tele-Systems has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 19%.

View our latest analysis for Exicom Tele-Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Exicom Tele-Systems' ROCE against it's prior returns. If you'd like to look at how Exicom Tele-Systems has performed in the past in other metrics, you can view this free graph of Exicom Tele-Systems' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Exicom Tele-Systems' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 1.9%, but since then they've fallen to 0.2%. And considering revenue has dropped while employing more capital, we'd be cautious. 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, Exicom Tele-Systems has decreased its current liabilities to 36% 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. 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.

The Bottom Line On Exicom Tele-Systems' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Exicom Tele-Systems have fallen, meanwhile the business is employing more capital than it was four years ago. It should come as no surprise then that the stock has fallen 28% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

While Exicom Tele-Systems doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for EXICOM on our platform.

While Exicom Tele-Systems 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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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.