Compucom Software (NSE:COMPUSOFT) Will Be Looking To Turn Around Its Returns

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Compucom Software (NSE:COMPUSOFT), we weren't too upbeat about how things were going.

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 Compucom Software:

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

0.023 = ₹32m ÷ (₹1.5b - ₹67m) (Based on the trailing twelve months to March 2021).

Therefore, Compucom Software has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 5.0%.

View our latest analysis for Compucom Software

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

So How Is Compucom Software's ROCE Trending?

We are a bit worried about the trend of returns on capital at Compucom Software. Unfortunately the returns on capital have diminished from the 9.1% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Compucom Software becoming one if things continue as they have.

On a side note, Compucom Software has done well to pay down its current liabilities to 4.6% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On Compucom Software's ROCE

In summary, it's unfortunate that Compucom Software is generating lower returns from the same amount of capital. However the stock has delivered a 77% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Compucom Software (of which 1 is significant!) that you should know about.

While Compucom 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. 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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