Can Trejhara Solutions (NSE:TREJHARA) Turn Things Around?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Trejhara Solutions (NSE:TREJHARA), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Trejhara Solutions, this is the formula:

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

0.02 = ₹92m ÷ (₹5.9b - ₹1.2b) (Based on the trailing twelve months to September 2020).

Thus, Trejhara Solutions has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 11%.

View our latest analysis for Trejhara Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Trejhara Solutions' ROCE against it's prior returns. If you'd like to look at how Trejhara Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Trejhara Solutions 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 3.2% that they were earning two years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 two years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Trejhara Solutions becoming one if things continue as they have.

What We Can Learn From Trejhara Solutions' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 151% over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Trejhara Solutions, we've spotted 3 warning signs, and 2 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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