Returns On Capital Signal Tricky Times Ahead For Silverlake Axis (SGX:5CP)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Silverlake Axis (SGX:5CP), it didn't seem to tick all of these boxes.

What is 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 Silverlake Axis:

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

0.18 = RM188m ÷ (RM1.4b - RM325m) (Based on the trailing twelve months to December 2020).

So, Silverlake Axis has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 10% it's much better.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Silverlake Axis Tell Us?

In terms of Silverlake Axis' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 44% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Silverlake Axis because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 47% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Silverlake Axis that you might find interesting.

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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