Returns On Capital At Alankit (NSE:ALANKIT) Paint An Interesting Picture

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Alankit (NSE:ALANKIT) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Alankit is:

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

0.12 = ₹154m ÷ (₹1.8b - ₹442m) (Based on the trailing twelve months to September 2020).

So, Alankit has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

Check out our latest analysis for Alankit

Historical performance is a great place to start when researching a stock so above you can see the gauge for Alankit's ROCE against it's prior returns. If you're interested in investigating Alankit's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Alankit's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 225% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that Alankit has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 25% of total assets, this reported ROCE would probably be less than12% because total capital employed would be higher.The 12% ROCE could be even lower if current liabilities weren't 25% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

What We Can Learn From Alankit's ROCE

The main thing to remember is that Alankit has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 12% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Alankit (including 1 which is significant) .

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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