Returns On Capital At Kellton Tech Solutions (NSE:KELLTONTEC) Paint A Concerning 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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Kellton Tech Solutions (NSE:KELLTONTEC) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kellton Tech Solutions:

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

0.18 = ₹938m ÷ (₹6.7b - ₹1.6b) (Based on the trailing twelve months to March 2022).

So, Kellton Tech Solutions has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 10.0% it's much better.

Check out our latest analysis for Kellton Tech Solutions

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kellton Tech Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

In terms of Kellton Tech Solutions' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 28% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Kellton Tech Solutions has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Kellton Tech Solutions' ROCE

In summary, Kellton Tech Solutions is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 28% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Kellton Tech Solutions does have some risks though, and we've spotted 2 warning signs for Kellton Tech Solutions that you might be interested in.

While Kellton Tech Solutions 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.