Ducon Infratechnolgies' (NSE:DUCON) Returns On Capital Are Heading Higher

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Ducon Infratechnolgies (NSE:DUCON) looks quite promising in regards to its trends of return on capital.

What is 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 Ducon Infratechnolgies is:

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

0.079 = ₹123m ÷ (₹2.9b - ₹1.4b) (Based on the trailing twelve months to December 2021).

Therefore, Ducon Infratechnolgies has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 12%.

Check out our latest analysis for Ducon Infratechnolgies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ducon Infratechnolgies' ROCE against it's prior returns. If you'd like to look at how Ducon Infratechnolgies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Ducon Infratechnolgies' ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.9%. 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 464%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 48% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Ducon Infratechnolgies' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ducon Infratechnolgies has. Astute investors may have an opportunity here because the stock has declined 68% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Ducon Infratechnolgies does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.