Apollo Pipes (NSE:APOLLOPIPE) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Apollo Pipes (NSE:APOLLOPIPE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Apollo Pipes:

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

0.088 = ₹395m ÷ (₹6.0b - ₹1.5b) (Based on the trailing twelve months to December 2022).

So, Apollo Pipes has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Building industry average of 13%.

View our latest analysis for Apollo Pipes

Historical performance is a great place to start when researching a stock so above you can see the gauge for Apollo Pipes' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Apollo Pipes, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Apollo Pipes, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.8% from 23% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Apollo Pipes' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Apollo Pipes. And long term investors must be optimistic going forward because the stock has returned a huge 506% to shareholders in the last three 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 Apollo Pipes you'll probably want to 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.