Can Adhunik Industries (NSE:ADHUNIKIND) Turn Things Around?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Adhunik Industries (NSE:ADHUNIKIND), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Adhunik Industries:

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

0.038 = ₹51m ÷ (₹1.8b - ₹434m) (Based on the trailing twelve months to December 2020).

Thus, Adhunik Industries has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.4%.

See our latest analysis for Adhunik Industries

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'd like to look at how Adhunik Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Adhunik Industries Tell Us?

In terms of Adhunik Industries' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 24% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Adhunik Industries to turn into a multi-bagger.

On a related note, Adhunik Industries has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, it's unfortunate that Adhunik Industries is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 69% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Adhunik Industries, we've spotted 4 warning signs, and 1 of them can't be ignored.

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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