There Are Reasons To Feel Uneasy About Salasar Techno Engineering's (NSE:SALASAR) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Salasar Techno Engineering (NSE:SALASAR), it didn't seem to tick all of these boxes.

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 Salasar Techno Engineering, this is the formula:

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

0.17 = ₹706m ÷ (₹8.1b - ₹3.8b) (Based on the trailing twelve months to December 2022).

So, Salasar Techno Engineering has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 12% it's much better.

See 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're interested in investigating Salasar Techno Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Salasar Techno Engineering doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 31% 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.

Another thing to note, Salasar Techno Engineering has a high ratio of current liabilities to total assets of 47%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Salasar Techno Engineering's 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 Salasar Techno Engineering. And long term investors must be optimistic going forward because the stock has returned a huge 122% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Salasar Techno Engineering does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.