Aptech (NSE:APTECHT) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 when we looked at Aptech (NSE:APTECHT) and its trend of ROCE, we really liked what we saw.

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 Aptech:

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

0.072 = ₹121m ÷ (₹2.2b - ₹524m) (Based on the trailing twelve months to March 2021).

So, Aptech has an ROCE of 7.2%. Even though it's in line with the industry average of 6.6%, it's still a low return by itself.

See our latest analysis for Aptech

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

What Can We Tell From Aptech's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Aptech. The data shows that returns on capital have increased by 123% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Aptech appears to been achieving more with less, since the business is using 27% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Aptech's ROCE

In summary, it's great to see that Aptech has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 257% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Aptech can keep these trends up, it could have a bright future ahead.

Aptech does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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