There Are Reasons To Feel Uneasy About Airan's (NSE:AIRAN) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Airan (NSE:AIRAN), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Airan:

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

0.045 = ₹40m ÷ (₹1.0b - ₹125m) (Based on the trailing twelve months to December 2020).

So, Airan has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

See our latest analysis for Airan

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Airan, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 7.3% five years ago. However it looks like Airan might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Airan's ROCE

To conclude, we've found that Airan is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last three years. 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.

Like most companies, Airan does come with some risks, and we've found 1 warning sign that you should be aware of.

While Airan may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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