Allsec Technologies (NSE:ALLSEC) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Allsec Technologies (NSE:ALLSEC), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Allsec Technologies:

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

0.15 = ₹425m ÷ (₹3.2b - ₹416m) (Based on the trailing twelve months to March 2021).

So, Allsec Technologies has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 8.0% it's much better.

Check out 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'd like to look at how Allsec Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Allsec Technologies' ROCE Trending?

On the surface, the trend of ROCE at Allsec Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. However it looks like Allsec Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Allsec Technologies has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that Allsec Technologies is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 87% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with Allsec Technologies (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.

While Allsec Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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