We're Watching These Trends At Kellton Tech Solutions (NSE:KELLTONTEC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Kellton Tech Solutions (NSE:KELLTONTEC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Kellton Tech Solutions is:

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

0.17 = ₹892m ÷ (₹7.0b - ₹1.7b) (Based on the trailing twelve months to September 2020).

Thus, Kellton Tech Solutions has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.

View 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 want to delve into the historical earnings, revenue and cash flow of Kellton Tech Solutions, check out these free graphs here.

What Does the ROCE Trend For Kellton Tech Solutions Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 29% five years ago, while capital employed has grown 280%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Kellton Tech Solutions probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Kellton Tech Solutions has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On Kellton Tech Solutions' ROCE

To conclude, we've found that Kellton Tech Solutions is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 6.3% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a final note, we've found 2 warning signs for Kellton Tech Solutions that we think you should be aware of.

While Kellton Tech Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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