Ahluwalia Contracts (India) (NSE:AHLUCONT) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Ahluwalia Contracts (India) (NSE:AHLUCONT) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Ahluwalia Contracts (India):

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

0.19 = ₹2.3b ÷ (₹21b - ₹8.9b) (Based on the trailing twelve months to September 2022).

Thus, Ahluwalia Contracts (India) has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

See our latest analysis for Ahluwalia Contracts (India)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Ahluwalia Contracts (India), check out these free graphs here.

What Does the ROCE Trend For Ahluwalia Contracts (India) Tell Us?

In terms of Ahluwalia Contracts (India)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 19% from 28% five years ago. However it looks like Ahluwalia Contracts (India) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Ahluwalia Contracts (India) has a high ratio of current liabilities to total assets of 42%. 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.

In Conclusion...

To conclude, we've found that Ahluwalia Contracts (India) is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Ahluwalia Contracts (India) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Ahluwalia Contracts (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.