Returns On Capital Signal Tricky Times Ahead For Dhruv Consultancy Services (NSE:DHRUV)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Dhruv Consultancy Services (NSE:DHRUV) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 3 warning signs about Dhruv Consultancy Services. View them for free.

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

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. To calculate this metric for Dhruv Consultancy Services, this is the formula:

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

0.076 = ₹80m ÷ (₹1.4b - ₹360m) (Based on the trailing twelve months to December 2024).

So, Dhruv Consultancy Services has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 16%.

See our latest analysis for Dhruv Consultancy Services

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'd like to look at how Dhruv Consultancy Services has performed in the past in other metrics, you can view this free graph of Dhruv Consultancy Services' past earnings, revenue and cash flow.

What Can We Tell From Dhruv Consultancy Services' ROCE Trend?

On the surface, the trend of ROCE at Dhruv Consultancy Services doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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 Dhruv Consultancy Services' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Dhruv Consultancy Services is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 5.5% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

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

While Dhruv Consultancy Services 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.