CyberLink's (TPE:5203) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within CyberLink (TPE:5203), we weren't too hopeful.

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. To calculate this metric for CyberLink, this is the formula:

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

0.054 = NT$237m ÷ (NT$5.1b - NT$714m) (Based on the trailing twelve months to December 2020).

Therefore, CyberLink has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Software industry average of 16%.

See our latest analysis for CyberLink

Above you can see how the current ROCE for CyberLink compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CyberLink here for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at CyberLink. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect CyberLink to turn into a multi-bagger.

Our Take On CyberLink's ROCE

In summary, it's unfortunate that CyberLink is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 65% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about CyberLink, we've spotted 3 warning signs, and 1 of them can't be ignored.

While CyberLink 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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