We're Watching These Trends At Ahlada Engineers (NSE:AHLADA)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Ahlada Engineers (NSE:AHLADA), it didn't seem to tick all of these boxes.

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. To calculate this metric for Ahlada Engineers, this is the formula:

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

0.099 = ₹128m ÷ (₹1.7b - ₹360m) (Based on the trailing twelve months to December 2020).

Therefore, Ahlada Engineers has an ROCE of 9.9%. On its own, that's a low figure but it's around the 11% average generated by the Building industry.

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're interested in investigating Ahlada Engineers' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Ahlada Engineers' ROCE Trending?

On the surface, the trend of ROCE at Ahlada Engineers doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.9% from 28% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Ahlada Engineers has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, we're somewhat concerned by Ahlada Engineers' diminishing returns on increasing amounts of capital. However the stock has delivered a 28% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 3 warning signs for Ahlada Engineers that we think you should be aware of.

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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