Is Ramco Systems (NSE:RAMCOSYS) Likely To Turn Things Around?

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Ramco Systems (NSE:RAMCOSYS), it didn't seem to tick all of these boxes.

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. To calculate this metric for Ramco Systems, this is the formula:

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

0.081 = ₹581m ÷ (₹9.7b - ₹2.5b) (Based on the trailing twelve months to September 2020).

Therefore, Ramco Systems has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Software industry average of 12%.

See our latest analysis for Ramco Systems

Above you can see how the current ROCE for Ramco Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ramco Systems here for free.

What Does the ROCE Trend For Ramco Systems Tell Us?

There hasn't been much to report for Ramco Systems' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Ramco Systems doesn't end up being a multi-bagger in a few years time.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 26% of total assets, this reported ROCE would probably be less than8.1% because total capital employed would be higher.The 8.1% ROCE could be even lower if current liabilities weren't 26% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On Ramco Systems' ROCE

We can conclude that in regards to Ramco Systems' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 9.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Ramco Systems does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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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