Capital Allocation Trends At Kellton Tech Solutions (NSE:KELLTONTEC) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Kellton Tech Solutions (NSE:KELLTONTEC), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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. To calculate this metric for Kellton Tech Solutions, this is the formula:

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

0.21 = ₹979m ÷ (₹6.3b - ₹1.6b) (Based on the trailing twelve months to June 2021).

Thus, Kellton Tech Solutions has an ROCE of 21%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

Check out our latest analysis for Kellton Tech Solutions

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

What Can We Tell From Kellton Tech Solutions' ROCE Trend?

We weren't thrilled with the trend because Kellton Tech Solutions' ROCE has reduced by 49% over the last five years, while the business employed 179% more capital. That being said, Kellton Tech Solutions raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Kellton Tech Solutions' earnings and if they change as a result from the capital raise. It's also worth noting the company's latest EBIT figure is within 10% of the previous year, so it's fair to assign the ROCE drop largely to the capital raise.

On a side note, Kellton Tech Solutions has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Kellton Tech Solutions is reinvesting in the business, but returns have been falling. Since the stock has declined 25% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

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

Kellton Tech Solutions is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

When trading Kellton Tech Solutions or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.