Returns On Capital Signal Tricky Times Ahead For Systech Bhd (KLSE:SYSTECH)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Systech Bhd (KLSE:SYSTECH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Systech Bhd, this is the formula:

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

0.025 = RM1.4m ÷ (RM60m - RM3.2m) (Based on the trailing twelve months to March 2021).

Therefore, Systech Bhd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.

See our latest analysis for Systech Bhd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Systech Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Systech Bhd, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Systech Bhd, we didn't gain much confidence. Around five years ago the returns on capital were 3.7%, but since then they've fallen to 2.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Our Take On Systech Bhd's ROCE

We're a bit apprehensive about Systech Bhd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 50% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Systech Bhd (including 1 which is significant) .

While Systech Bhd 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. 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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