ROX Hi-Tech (NSE:ROXHITECH) Knows How To Allocate Capital Effectively

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of ROX Hi-Tech (NSE:ROXHITECH) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for ROX Hi-Tech:

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

0.28 = ₹301m ÷ (₹2.0b - ₹914m) (Based on the trailing twelve months to September 2024).

Thus, ROX Hi-Tech has an ROCE of 28%. In absolute terms that's a great return and it's even better than the IT industry average of 14%.

Check out our latest analysis for ROX Hi-Tech

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 , check out these free graphs detailing revenue and cash flow performance of ROX Hi-Tech.

How Are Returns Trending?

Investors would be pleased with what's happening at ROX Hi-Tech. Over the last three years, returns on capital employed have risen substantially to 28%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 715%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 46%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that ROX Hi-Tech has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On ROX Hi-Tech's ROCE

All in all, it's terrific to see that ROX Hi-Tech is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 48% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

ROX Hi-Tech does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.