Expleo Solutions (NSE:EXPLEOSOL) Knows How to Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. That's why when we briefly looked at Expleo Solutions' (NSE:EXPLEOSOL) ROCE trend, we were very happy with what we saw.

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 Expleo Solutions is:

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

0.32 = ₹591m ÷ (₹2.4b - ₹559m) (Based on the trailing twelve months to September 2020).

Thus, Expleo Solutions has an ROCE of 32%. In absolute terms that's a great return and it's even better than the IT industry average of 11%.

View our latest analysis for Expleo Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Expleo Solutions' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Expleo Solutions, check out these free graphs here.

The Trend Of ROCE

It's hard not to be impressed by Expleo Solutions' returns on capital. The company has consistently earned 32% for the last five years, and the capital employed within the business has risen 55% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Key Takeaway

In short, we'd argue Expleo Solutions has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last five years the stock has declined 45%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Expleo Solutions does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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