Yaarii Digital Integrated Services (NSE:YAARII) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Yaarii Digital Integrated Services (NSE:YAARII) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Yaarii Digital Integrated Services is:

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

0.086 = ₹499m ÷ (₹16b - ₹10b) (Based on the trailing twelve months to March 2021).

So, Yaarii Digital Integrated Services has an ROCE of 8.6%. On its own, that's a low figure but it's around the 9.7% average generated by the Commercial Services industry.

See our latest analysis for Yaarii Digital Integrated Services

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

What Does the ROCE Trend For Yaarii Digital Integrated Services Tell Us?

We're pretty happy with how the ROCE has been trending at Yaarii Digital Integrated Services. The data shows that returns on capital have increased by 123% over the trailing five years. The company is now earning ₹0.09 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 55% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Yaarii Digital Integrated Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 64% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Yaarii Digital Integrated Services' ROCE

In the end, Yaarii Digital Integrated Services has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 416% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 2 warning signs for Yaarii Digital Integrated Services (1 doesn't sit too well with us) you should be aware of.

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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