What Do The Returns On Capital At Advanced Enzyme Technologies (NSE:ADVENZYMES) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Advanced Enzyme Technologies (NSE:ADVENZYMES), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Advanced Enzyme Technologies:

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

0.20 = ₹1.9b ÷ (₹10b - ₹612m) (Based on the trailing twelve months to September 2020).

Therefore, Advanced Enzyme Technologies has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 14% it's much better.

Check out our latest analysis for Advanced Enzyme Technologies

Above you can see how the current ROCE for Advanced Enzyme Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Advanced Enzyme Technologies here for free.

What The Trend Of ROCE Can Tell Us

In terms of Advanced Enzyme Technologies' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 20% from 34% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Advanced Enzyme Technologies has decreased its current liabilities to 5.9% 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.

Our Take On Advanced Enzyme Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by Advanced Enzyme Technologies' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 19% over the last three years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Advanced Enzyme Technologies and understanding these should be part of your investment process.

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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