Capital Allocation Trends At KN Agri Resources (NSE:KNAGRI) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at KN Agri Resources (NSE:KNAGRI), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for KN Agri Resources, this is the formula:

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

0.17 = ₹478m ÷ (₹3.8b - ₹973m) (Based on the trailing twelve months to March 2023).

Thus, KN Agri Resources has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 13% it's much better.

See our latest analysis for KN Agri Resources

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating KN Agri Resources' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at KN Agri Resources, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 17% from 26% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, KN Agri Resources has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From KN Agri Resources' 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 KN Agri Resources. And there could be an opportunity here if other metrics look good too, because the stock has declined 16% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

KN Agri Resources does have some risks though, and we've spotted 2 warning signs for KN Agri Resources that you might be interested in.

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.