Allsec Technologies (NSE:ALLSEC) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, while the ROCE is currently high for Allsec Technologies (NSE:ALLSEC), we aren't jumping out of our chairs because returns are decreasing.

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 Allsec Technologies is:

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

0.21 = ₹546m ÷ (₹3.0b - ₹410m) (Based on the trailing twelve months to September 2021).

So, Allsec Technologies has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 8.1%.

See our latest analysis for Allsec Technologies

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

What Does the ROCE Trend For Allsec Technologies Tell Us?

On the surface, the trend of ROCE at Allsec Technologies doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 43% where it was five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Allsec Technologies' ROCE

In summary, Allsec Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 80% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Allsec Technologies, we've spotted 3 warning signs, and 1 of them is concerning.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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.

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