Sify Technologies (NASDAQ:SIFY) Has Some Way To Go To Become A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Sify Technologies' (NASDAQ:SIFY) ROCE trend, we were pretty happy with what we saw.

What is 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. The formula for this calculation on Sify Technologies is:

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

0.12 = ₹2.1b ÷ (₹36b - ₹18b) (Based on the trailing twelve months to December 2020).

Therefore, Sify Technologies has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

View our latest analysis for Sify Technologies

In the above chart we have measured Sify Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 94% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Sify Technologies has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another thing to note, Sify Technologies has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Sify Technologies' ROCE

The main thing to remember is that Sify Technologies has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 186% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 2 warning signs for Sify Technologies that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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