Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Powermatic Data Systems (SGX:BCY), we weren't too hopeful.

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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. The formula for this calculation on Powermatic Data Systems is:

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

0.078 = 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 7.8%. In absolute terms, that's a low return, but it's much better than the Communications industry average of 5.8%.

View 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're interested in investigating Powermatic Data Systems' past further, check out this free graph covering Powermatic Data Systems' past earnings, revenue and cash flow .

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Powermatic Data Systems. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Powermatic Data Systems to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 43% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Powermatic Data Systems, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

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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