Returns On Capital Are Showing Encouraging Signs At Allied Digital Services (NSE:ADSL)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.

What Is Return On Capital Employed (ROCE)?

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 Allied Digital Services:

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

0.12 = ₹705m ÷ (₹7.2b - ₹1.1b) (Based on the trailing twelve months to September 2023).

Thus, Allied Digital Services has an ROCE of 12%. In isolation, that's a pretty standard return but against the IT industry average of 15%, it's not as good.

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'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 Does the ROCE Trend For Allied Digital Services Tell Us?

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 12%. The amount of capital employed 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.

What We Can Learn From 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. Since the stock has returned a staggering 931% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for Allied Digital Services you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.