How Well Is Adhunik Industries (NSE:ADHUNIKIND) Allocating Its Capital?

What underlying fundamental trends can indicate that a company might be in decline? 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 the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Adhunik Industries (NSE:ADHUNIKIND), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.031 = ₹42m ÷ (₹1.8b - ₹434m) (Based on the trailing twelve months to September 2020).

So, Adhunik Industries has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.8%.

See our latest analysis for Adhunik Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Adhunik Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Adhunik Industries, check out these free graphs here.

So How Is Adhunik Industries' ROCE Trending?

There is reason to be cautious about Adhunik Industries, given the returns are trending downwards. To be more specific, the ROCE was 29% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. 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. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Adhunik Industries' ROCE

In summary, it's unfortunate that Adhunik Industries is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 70% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Adhunik Industries (including 1 which is is potentially serious) .

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

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This article by Simply Wall St is general in nature. 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.
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