Returns On Capital Are Showing Encouraging Signs At E2E Networks (NSE:E2E)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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, we've noticed some promising trends at E2E Networks (NSE:E2E) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for E2E Networks, this is the formula:

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

0.079 = ₹508m ÷ (₹7.7b - ₹1.2b) (Based on the trailing twelve months to September 2024).

So, E2E Networks has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

View our latest analysis for E2E Networks

Historical performance is a great place to start when researching a stock so above you can see the gauge for E2E Networks' ROCE against it's prior returns. If you'd like to look at how E2E Networks has performed in the past in other metrics, you can view this free graph of E2E Networks' past earnings, revenue and cash flow.

What Does the ROCE Trend For E2E Networks Tell Us?

We're delighted to see that E2E Networks is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.9% on its capital. And unsurprisingly, like most companies trying to break into the black, E2E Networks is utilizing 2,005% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From E2E Networks' ROCE

Long story short, we're delighted to see that E2E Networks' reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for E2E Networks (of which 1 shouldn't be ignored!) that you should know about.

While E2E Networks 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. 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.