Ahlada Engineers (NSE:AHLADA) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Ahlada Engineers (NSE:AHLADA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ahlada Engineers:

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

0.054 = ₹72m ÷ (₹1.8b - ₹525m) (Based on the trailing twelve months to December 2022).

Therefore, Ahlada Engineers has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Building industry average of 13%.

Check out our latest analysis for Ahlada Engineers

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

What Can We Tell From Ahlada Engineers' ROCE Trend?

On the surface, the trend of ROCE at Ahlada Engineers doesn't inspire confidence. To be more specific, ROCE has fallen from 29% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Ahlada Engineers has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Ahlada Engineers' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Ahlada Engineers have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 102% over the last three years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ahlada Engineers (of which 1 is significant!) that you should know about.

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.

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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.