Powermatic Data Systems' (SGX:BCY) Returns On Capital Not Reflecting Well On The Business

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Powermatic Data Systems (SGX:BCY) we aren't filled with optimism, but let's investigate further.

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 Powermatic Data Systems, this is the formula:

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

0.079 = S$5.7m ÷ (S$78m - S$5.3m) (Based on the trailing twelve months to September 2024).

Thus, Powermatic Data Systems has an ROCE of 7.9%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 5.2%.

Check out our latest analysis for Powermatic Data Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Powermatic Data Systems' ROCE against it's prior returns. If you'd like to look at how Powermatic Data Systems has performed in the past in other metrics, you can view this free graph of Powermatic Data Systems' past earnings, revenue and cash flow.

What Does the ROCE Trend For Powermatic Data Systems Tell Us?

In terms of Powermatic Data Systems' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Powermatic Data Systems becoming one if things continue as they have.

What We Can Learn From Powermatic Data Systems' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 38% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Powermatic Data Systems does have some risks, we noticed 3 warning signs (and 2 which are potentially serious) we think you should know about.

While Powermatic Data Systems 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.