Akash Infra-Projects (NSE:AKASH) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Akash Infra-Projects (NSE:AKASH), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Akash Infra-Projects, this is the formula:

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

0.022 = ₹21m ÷ (₹2.1b - ₹1.1b) (Based on the trailing twelve months to September 2024).

Therefore, Akash Infra-Projects has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

View our latest analysis for Akash Infra-Projects

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

What Does the ROCE Trend For Akash Infra-Projects Tell Us?

In terms of Akash Infra-Projects' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Akash Infra-Projects becoming one if things continue as they have.

On a side note, Akash Infra-Projects' current liabilities have increased over the last five years to 53% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Akash Infra-Projects' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 64% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Akash Infra-Projects, we've discovered 3 warning signs that you should be aware of.

While Akash Infra-Projects 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.