Returns On Capital At Firstsource Solutions (NSE:FSL) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Firstsource Solutions' (NSE:FSL) ROCE trend, we were pretty happy with what we saw.

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. To calculate this metric for Firstsource Solutions, this is the formula:

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

0.16 = ₹7.0b ÷ (₹61b - ₹16b) (Based on the trailing twelve months to March 2024).

Thus, Firstsource Solutions has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 13%.

Check out our latest analysis for Firstsource Solutions

Above you can see how the current ROCE for Firstsource Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Firstsource Solutions .

What Does the ROCE Trend For Firstsource Solutions Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 60% more capital into its operations. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

The main thing to remember is that Firstsource Solutions has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 328% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for Firstsource Solutions you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.