Should You Be Impressed By Silver Touch Technologies' (NSE:SILVERTUC) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Silver Touch Technologies (NSE:SILVERTUC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.017 = ₹15m ÷ (₹1.3b - ₹421m) (Based on the trailing twelve months to September 2020).

Thus, Silver Touch Technologies has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 11%.

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 want to delve into the historical earnings, revenue and cash flow of Silver Touch Technologies, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Silver Touch Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 1.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 side note, Silver Touch Technologies has done well to pay down its current liabilities to 33% 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.

Our Take On Silver Touch Technologies' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Silver Touch Technologies have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Silver Touch Technologies (1 shouldn't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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