We Like These Underlying Return On Capital Trends At Allied Digital Services (NSE:ADSL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Allied Digital Services (NSE:ADSL) so let's look a bit deeper.

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. To calculate this metric for Allied Digital Services, this is the formula:

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

0.11 = ₹651m ÷ (₹7.4b - ₹1.2b) (Based on the trailing twelve months to September 2022).

Thus, Allied Digital Services has an ROCE of 11%. In isolation, that's a pretty standard return but against the IT industry average of 13%, it's not as good.

Our analysis indicates that ADSL is potentially undervalued!

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Allied Digital Services' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Allied Digital Services' ROCE Trending?

We like the trends that we're seeing from Allied Digital Services. The data shows that returns on capital have increased substantially over the last five years to 11%. 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 27%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Allied Digital Services has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

All in all, it's terrific to see that Allied Digital Services is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 450% 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.

If you want to continue researching Allied Digital Services, you might be interested to know about the 4 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.