Stock Analysis

Aegis Logistics (NSE:AEGISCHEM) Could Be Struggling To Allocate Capital

NSEI:AEGISLOG
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Aegis Logistics (NSE:AEGISCHEM), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Aegis Logistics:

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

0.15 = ₹4.2b ÷ (₹32b - ₹4.6b) (Based on the trailing twelve months to December 2021).

Therefore, Aegis Logistics has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Oil and Gas industry.

View our latest analysis for Aegis Logistics

roce
NSEI:AEGISCHEM Return on Capital Employed May 16th 2022

In the above chart we have measured Aegis Logistics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Aegis Logistics' ROCE Trending?

On the surface, the trend of ROCE at Aegis Logistics doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 15%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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 side note, Aegis Logistics has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Aegis Logistics' ROCE

We're a bit apprehensive about Aegis Logistics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 1.9% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 2 warning signs for Aegis Logistics that we think you should be aware of.

While Aegis Logistics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Aegis Logistics is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.