Allied Digital Services (NSE:ADSL) Might Have The Makings Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Allied Digital Services (NSE:ADSL) so let's look a bit deeper.

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 Allied Digital Services is:

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

0.062 = ₹341m ÷ (₹6.7b - ₹1.2b) (Based on the trailing twelve months to December 2021).

Thus, Allied Digital Services has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

See our latest analysis for Allied Digital Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Allied Digital Services' ROCE against it's prior returns. If you'd like to look at how Allied Digital Services has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Allied Digital Services' ROCE Trend?

Allied Digital Services is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 44% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

In summary, we're delighted to see that Allied Digital Services has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Allied Digital Services can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 4 warning signs facing Allied Digital Services that you might find interesting.

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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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.