Investors Could Be Concerned With Ahluwalia Contracts (India)'s (NSE:AHLUCONT) Returns On Capital

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. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ahluwalia Contracts (India) is:

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

0.16 = ₹3.2b ÷ (₹32b - ₹12b) (Based on the trailing twelve months to March 2024).

Thus, Ahluwalia Contracts (India) has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Construction industry.

View our latest analysis for Ahluwalia Contracts (India)

Above you can see how the current ROCE for Ahluwalia Contracts (India) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ahluwalia Contracts (India) for free.

What Can We Tell From Ahluwalia Contracts (India)'s ROCE Trend?

When we looked at the ROCE trend at Ahluwalia Contracts (India), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 23% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Ahluwalia Contracts (India) is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 302% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 1 warning sign for Ahluwalia Contracts (India) you'll probably want to know about.

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.

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