Salasar Techno Engineering (NSE:SALASAR) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So while Salasar Techno Engineering (NSE:SALASAR) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. To calculate this metric for Salasar Techno Engineering, this is the formula:

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

0.20 = ₹937m ÷ (₹10b - ₹5.5b) (Based on the trailing twelve months to September 2023).

Therefore, Salasar Techno Engineering has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out our latest analysis for Salasar Techno Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Salasar Techno Engineering's ROCE against it's prior returns. If you'd like to look at how Salasar Techno Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Salasar Techno Engineering's ROCE Trend?

When we looked at the ROCE trend at Salasar Techno Engineering, we didn't gain much confidence. Historically returns on capital were even higher at 31%, but they have dropped over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Salasar Techno Engineering's current liabilities are still rather high at 54% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Salasar Techno Engineering is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 439% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Salasar Techno Engineering that we think you should be aware of.

Salasar Techno Engineering is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.