Investors Will Want Alok Industries' (NSE:ALOKINDS) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Alok Industries (NSE:ALOKINDS) and its trend of ROCE, we really liked what we saw.

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 Alok Industries is:

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

0.054 = ₹2.6b ÷ (₹80b - ₹33b) (Based on the trailing twelve months to December 2021).

Therefore, Alok Industries has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 14%.

Check out our latest analysis for Alok Industries

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

So How Is Alok Industries' ROCE Trending?

Like most people, we're pleased that Alok Industries is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 5.4% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 66%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a related note, the company's ratio of current liabilities to total assets has decreased to 41%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Alok Industries' ROCE

In the end, Alok Industries has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 727% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 2 warning signs for Alok Industries (1 can't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.