Sasken Technologies (NSE:SASKEN) Could Be At Risk Of Shrinking As A Company

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Sasken Technologies (NSE:SASKEN), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sasken Technologies is:

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

0.047 = ₹355m ÷ (₹8.4b - ₹836m) (Based on the trailing twelve months to December 2023).

Therefore, Sasken Technologies has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Software industry average of 15%.

View our latest analysis for Sasken Technologies

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're interested in investigating Sasken Technologies' past further, check out this free graph covering Sasken Technologies' past earnings, revenue and cash flow.

What Does the ROCE Trend For Sasken Technologies Tell Us?

There is reason to be cautious about Sasken Technologies, given the returns are trending downwards. About five years ago, returns on capital were 9.3%, however they're now substantially lower than that as we saw above. 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 Sasken Technologies becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Sasken Technologies is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 189% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Sasken Technologies does have some risks though, and we've spotted 3 warning signs for Sasken Technologies that you might be interested in.

While Sasken Technologies 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.