The Returns On Capital At Ador Welding (NSE:ADORWELD) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Ador Welding (NSE:ADORWELD) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ador Welding, this is the formula:

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

0.038 = ₹94m ÷ (₹4.0b - ₹1.5b) (Based on the trailing twelve months to December 2020).

Therefore, Ador Welding has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

View our latest analysis for Ador Welding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ador Welding's ROCE against it's prior returns. If you're interested in investigating Ador Welding's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Ador Welding's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 13%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Ador Welding to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Ador Welding is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 31% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Ador Welding we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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