Investors Could Be Concerned With Silverlake Axis' (SGX:5CP) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Silverlake Axis (SGX:5CP), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Silverlake Axis:

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

0.17 = RM192m ÷ (RM1.4b - RM231m) (Based on the trailing twelve months to September 2021).

Thus, Silverlake Axis has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 9.6% it's much better.

See our latest analysis for Silverlake Axis

Above you can see how the current ROCE for Silverlake Axis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Silverlake Axis.

The Trend Of ROCE

On the surface, the trend of ROCE at Silverlake Axis doesn't inspire confidence. To be more specific, ROCE has fallen from 40% over the last five years. However it looks like Silverlake Axis might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Silverlake Axis' ROCE

Bringing it all together, while we're somewhat encouraged by Silverlake Axis' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 2 warning signs for Silverlake Axis you'll probably want to know about.

While Silverlake Axis may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.