Returns On Capital Signal Difficult Times Ahead For Kellton Tech Solutions (NSE:KELLTONTEC)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Kellton Tech Solutions (NSE:KELLTONTEC), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

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. 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 = ₹988m ÷ (₹7.1b - ₹1.7b) (Based on the trailing twelve months to September 2024).

So, Kellton Tech Solutions has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the IT industry.

See 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'd like to look at how Kellton Tech Solutions has performed in the past in other metrics, you can view this free graph of Kellton Tech Solutions' past earnings, revenue and cash flow.

So How Is Kellton Tech Solutions' ROCE Trending?

We are a bit worried about the trend of returns on capital at Kellton Tech Solutions. To be more specific, the ROCE was 23% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Kellton Tech Solutions to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 851%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 1 warning sign with Kellton Tech Solutions and understanding it should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.