Investors Could Be Concerned With Alankit's (NSE:ALANKIT) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think Alankit (NSE:ALANKIT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Alankit is:

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

0.0056 = ₹11m ÷ (₹3.0b - ₹1.0b) (Based on the trailing twelve months to June 2023).

Thus, Alankit has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 14%.

Check out our latest analysis for Alankit

Historical performance is a great place to start when researching a stock so above you can see the gauge for Alankit's ROCE against it's prior returns. If you'd like to look at how Alankit 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 Alankit's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 130%. That being said, Alankit raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Alankit probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

To conclude, we've found that Alankit is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Alankit does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

While Alankit 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.