Here's What To Make Of Krsnaa Diagnostics' (NSE:KRSNAA) Decelerating Rates Of Return

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. Having said that, from a first glance at Krsnaa Diagnostics (NSE:KRSNAA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Krsnaa Diagnostics is:

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

0.078 = ₹697m ÷ (₹12b - ₹2.8b) (Based on the trailing twelve months to March 2024).

Thus, Krsnaa Diagnostics has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 14%.

Check out our latest analysis for Krsnaa Diagnostics

In the above chart we have measured Krsnaa Diagnostics' 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 Krsnaa Diagnostics for free.

What The Trend Of ROCE Can Tell Us

In terms of Krsnaa Diagnostics' historical ROCE trend, it doesn't exactly demand attention. The company has employed 150% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

Long story short, while Krsnaa Diagnostics has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 16% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Krsnaa Diagnostics (of which 1 is a bit concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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