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NetSol Technologies (NASDAQ:NTWK) Could Be At Risk Of Shrinking As A Company

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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into NetSol Technologies (NASDAQ:NTWK), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on NetSol Technologies is:

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

0.017 = US$1.0m ÷ (US$81m - US$21m) (Based on the trailing twelve months to September 2021).

So, NetSol Technologies has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.

View our latest analysis for NetSol Technologies

roce
roce

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

So How Is NetSol Technologies' ROCE Trending?

The trend of ROCE at NetSol Technologies is showing some signs of weakness. To be more specific, today's ROCE was 9.1% five years ago but has since fallen to 1.7%. In addition to that, NetSol Technologies is now employing 24% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line On NetSol Technologies' ROCE

In summary, it's unfortunate that NetSol Technologies is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 22% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching NetSol Technologies, you might be interested to know about the 3 warning signs that our analysis has discovered.

While NetSol Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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