If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Airan (NSE:AIRAN), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Airan is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = ₹61m ÷ (₹1.2b - ₹207m) (Based on the trailing twelve months to March 2021).
So, Airan has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the IT industry average of 11%.
Check out our latest analysis for Airan
Historical performance is a great place to start when researching a stock so above you can see the gauge for Airan's ROCE against it's prior returns. If you're interested in investigating Airan's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Airan Tell Us?
There are better returns on capital out there than what we're seeing at Airan. The company has consistently earned 6.3% for the last five years, and the capital employed within the business has risen 277% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Airan's ROCE
In summary, Airan has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 28% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Airan does have some risks though, and we've spotted 2 warning signs for Airan that you might be interested in.
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. 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.
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About NSEI:AIRAN
Airan
Provides information technology (IT) and IT-enabled services in India.
Flawless balance sheet with solid track record.
