Here's What's Concerning About Affle 3i's (NSE:AFFLE) Returns On Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Affle 3i (NSE:AFFLE) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Affle 3i:

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

0.13 = ₹3.6b ÷ (₹33b - ₹5.4b) (Based on the trailing twelve months to December 2024).

Therefore, Affle 3i has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 9.1% it's much better.

Check out our latest analysis for Affle 3i

Above you can see how the current ROCE for Affle 3i compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Affle 3i .

What Does the ROCE Trend For Affle 3i Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 38% five years ago, while the business's capital employed increased by 1,274%. That being said, Affle 3i raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Affle 3i probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Affle 3i has decreased its current liabilities to 16% 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. 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 Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Affle 3i is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 449% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

While Affle 3i doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for AFFLE on our platform.

While Affle 3i may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.