Be Wary Of Silver Touch Technologies (NSE:SILVERTUC) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Silver Touch Technologies (NSE:SILVERTUC), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Silver Touch Technologies:

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

0.12 = ₹123m ÷ (₹1.5b - ₹419m) (Based on the trailing twelve months to June 2023).

Thus, Silver Touch Technologies has an ROCE of 12%. In isolation, that's a pretty standard return but against the IT industry average of 15%, it's not as good.

View our latest analysis for Silver Touch Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Silver Touch Technologies' ROCE against it's prior returns. If you're interested in investigating Silver Touch Technologies' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Silver Touch Technologies Tell Us?

On the surface, the trend of ROCE at Silver Touch Technologies doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Silver Touch Technologies has decreased its current liabilities to 28% 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. 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 Silver Touch Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Silver Touch Technologies is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 382% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing Silver Touch Technologies we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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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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.