The Returns On Capital At Avanti Feeds (NSE:AVANTIFEED) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Avanti Feeds (NSE:AVANTIFEED) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Avanti Feeds, this is the formula:

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

0.12 = ₹2.5b ÷ (₹25b - ₹4.2b) (Based on the trailing twelve months to December 2021).

Therefore, Avanti Feeds has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

Check out our latest analysis for Avanti Feeds

In the above chart we have measured Avanti Feeds' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Avanti Feeds here for free.

So How Is Avanti Feeds' ROCE Trending?

When we looked at the ROCE trend at Avanti Feeds, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Avanti Feeds' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Avanti Feeds. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Avanti Feeds does come with some risks, and we've found 3 warning signs that you should be aware of.

While Avanti Feeds may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.