Sify Technologies (NASDAQ:SIFY) Hasn't Managed To Accelerate Its Returns
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Sify Technologies (NASDAQ:SIFY), we don't think it's current trends fit the mold of a multi-bagger.
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)
0.094 = ₹2.6b ÷ (₹52b - ₹24b) (Based on the trailing twelve months to December 2022).
So, Sify Technologies has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.5% generated by the Telecom industry, it's much better.
See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Sify Technologies.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Sify Technologies. The company has employed 154% more capital in the last five years, and the returns on that capital have remained stable at 9.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a separate but related note, it's important to know that Sify Technologies has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Sify Technologies' ROCE
In summary, Sify Technologies has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sify Technologies has the makings of a multi-bagger.
One more thing: We've identified 2 warning signs with Sify Technologies (at least 1 which can't be ignored) , and understanding them would certainly be useful.
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.
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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