Amber Enterprises India (NSE:AMBER) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Amber Enterprises India (NSE:AMBER), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on Amber Enterprises India is:

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

0.062 = ₹1.1b ÷ (₹25b - ₹7.6b) (Based on the trailing twelve months to December 2020).

Thus, Amber Enterprises India has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

View our latest analysis for Amber Enterprises India

Above you can see how the current ROCE for Amber Enterprises India 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 report for Amber Enterprises India.

What Does the ROCE Trend For Amber Enterprises India Tell Us?

In terms of Amber Enterprises India's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Amber Enterprises India has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Amber Enterprises India's ROCE

We're a bit apprehensive about Amber Enterprises India because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 188% over the last three years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 2 warning signs for Amber Enterprises India that we think 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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