Be Wary Of Trejhara Solutions (NSE:TREJHARA) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Trejhara Solutions (NSE:TREJHARA), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Trejhara Solutions is:

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

0.023 = ₹106m ÷ (₹5.9b - ₹1.2b) (Based on the trailing twelve months to December 2020).

So, Trejhara Solutions has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

See our latest analysis for Trejhara 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're interested in investigating Trejhara Solutions' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Trejhara Solutions, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.4% that they were earning two years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Trejhara Solutions to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Trejhara Solutions is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 611% over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Trejhara Solutions (2 are a bit concerning) you should be aware of.

While Trejhara 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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