Krishna Defence and Allied Industries (NSE:KRISHNADEF) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Krishna Defence and Allied Industries (NSE:KRISHNADEF) and its trend of ROCE, we really liked what we saw.

Understanding 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 Krishna Defence and Allied Industries is:

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

0.19 = ₹226m ÷ (₹1.5b - ₹305m) (Based on the trailing twelve months to September 2024).

Thus, Krishna Defence and Allied Industries has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Aerospace & Defense industry average of 16%.

Check out our latest analysis for Krishna Defence and Allied Industries

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

The Trend Of ROCE

The trends we've noticed at Krishna Defence and Allied Industries are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 298%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Krishna Defence and Allied Industries has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Krishna Defence and Allied Industries has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Krishna Defence and Allied Industries' ROCE

To sum it up, Krishna Defence and Allied Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 88% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Krishna Defence and Allied Industries does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Krishna Defence and Allied Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.