Alankit's (NSE:ALANKIT) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Having said that, from a first glance at Alankit (NSE:ALANKIT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Alankit:

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

0.099 = ₹128m ÷ (₹1.7b - ₹369m) (Based on the trailing twelve months to March 2021).

Thus, Alankit has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the IT industry average of 12%.

Check out our latest analysis for Alankit

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 Alankit, check out these free graphs here.

What Does the ROCE Trend For Alankit Tell Us?

On the surface, the trend of ROCE at Alankit doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Alankit's current liabilities have increased over the last five years to 22% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 9.9%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

In summary, we're somewhat concerned by Alankit's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 41% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Alankit, we've discovered 3 warning signs that you should be aware of.

While Alankit 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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