Can This Winning Company Continue to Grow its Profits?

Welcome to the second part of the article on software systems provider, Silverlake Axis Ltd (SGX: 5CP). In my previous article, I covered the sources of revenue growth for Silverlake Axis. Today, we look at the cash flow and balance sheet for the company.

As a recap: The company recorded capital returns of about 681% from 1 July 2009 to the closing price on 19 November 2014. During the same timeframe, the company also distributed a total of about 12 cents per share in dividends.

Silverlake Axis is a software solutions provider primarily for the banking and financial services sector, and other industries. The company has six major business segments, as listed below:

  1. Software Licensing: licensing revenue from its Silverlake Axis Banking Solution (SIBS)
  2. Software Project: project implementation services to deliver end-to-end solutions to the customer
  3. Maintenance and Enhancement Services: software maintenance services which ensure smooth running of customer’s daily operations
  4. Sale of Software and Hardware Products: bundled third party hardware or system software with SIBS or other software services that the company offers
  5. Credit and Cards Processing: Silverlake Japan’s outsourcing service to banks for processing of credit and cards
  6. Insurance Processing: Silverlake Axis’ Merimen Venture subsidiary which provides a Software as a Service (Saas) platform for the insurance sector.

A closer look at cash flow

Can This Winning Company Continue to Grow its Profits? - 1 Silverlake

Source: Company Earnings Report

From the graph above, we can conclude that the capital expenditure for Silverlake Axis is negligible which would be common for a software firm. What is important is that the company generates copious amounts of free cash flow (operating cashflow minus capital expenditure) which it can use to pay out fat dividends or fund further accretive acquisitions. Next up, we look at the cash and debt on its balance sheet.

Can This Winning Company Continue to Grow its Profits? - 2 Silverlake

Source: Company Earnings Report

With the abundant amount of free cash flow inthe previous graph, it follows that the balance sheet for the software firm also has grown healthier as the years progress.

Foolish summary

At the current elevated price-to-earnings level, Foolish investors may want to keep their eyes on the future growth plans for Silverlake Axis. Its acquired stakes in Isis International, Merimen Ventures and Cyber Village Sdn Bhd. (CVSB), while still small in the scheme of things, can contribute valuable recurring revenue to the company, and subsequently, recurring free cash-flow. The acquisitions also broaden the amount of the industries that the company serves.

In the long term, it may be useful for Silverlake Axis to diversify its sources of revenue and income, as to reduce its reliance on the banking and financial services sector. Here’s a datapoint to note: in the FY2009, the company’s revenue fell from MYR 147 million in the preceding year to MYR 55 million due to the Great Financial Crisis. Back then, it was the recurring revenue which ultimately kept the company afloat.  In diversifying the sources of revenue and income – the key, of course, is how well the company is able to manage the resulting diversity of industries, and remain focused on its varying customer’s needs.

As of the closing price on 19th November 2014 of $1.25, Silverlake Axis traded at a trailing earnings ratio of about 29, and has a dividend yield of around 3.1%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.