Returns At Allied Digital Services (NSE:ADSL) Are On The Way Up

What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Allied Digital Services (NSE:ADSL) and its trend of ROCE, we really liked what we saw.

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

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 Allied Digital Services:

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

0.10 = ₹612m ÷ (₹7.2b - ₹1.1b) (Based on the trailing twelve months to December 2023).

Thus, Allied Digital Services has an ROCE of 10%. In isolation, that's a pretty standard return but against the IT industry average of 20%, it's not as good.

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're interested in investigating Allied Digital Services' past further, check out this free graph covering Allied Digital Services' past earnings, revenue and cash flow.

How Are Returns Trending?

The trends we've noticed at Allied Digital Services are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. So we're very much inspired by what we're seeing at Allied Digital Services thanks to its ability to profitably reinvest capital.

The Bottom Line On Allied Digital Services' ROCE

To sum it up, Allied Digital Services has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with Allied Digital Services (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

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.