Some Investors May Be Worried About One Point One Solutions' (NSE:ONEPOINT) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 investigating One Point One Solutions (NSE:ONEPOINT), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for One Point One Solutions:

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

0.16 = ₹136m ÷ (₹1.3b - ₹486m) (Based on the trailing twelve months to December 2022).

Therefore, One Point One Solutions has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 12% it's much better.

View our latest analysis for One Point One Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for One Point One Solutions' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of One Point One Solutions, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at One Point One Solutions doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 16%. However it looks like One Point One Solutions 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From One Point One Solutions' ROCE

To conclude, we've found that One Point One Solutions is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 229% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 2 warning signs we've spotted with One Point One Solutions (including 1 which is significant) .

While One Point One Solutions 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.