Investors Met With Slowing Returns on Capital At Allied Digital Services (NSE:ADSL)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Allied Digital Services (NSE:ADSL) and its ROCE trend, we weren't exactly thrilled.

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 Allied Digital Services:

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

0.061 = ₹335m ÷ (₹6.7b - ₹1.2b) (Based on the trailing twelve months to September 2021).

Therefore, Allied Digital Services has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

View 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 want to delve into the historical earnings, revenue and cash flow of Allied Digital Services, check out these free graphs here.

So How Is Allied Digital Services' ROCE Trending?

Things have been pretty stable at Allied Digital Services, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Allied Digital Services to be a multi-bagger going forward.

The Key Takeaway

In summary, Allied Digital Services isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 200% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Allied Digital Services, you might be interested to know about the 5 warning signs that our analysis has discovered.

While Allied Digital Services 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. 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.