Aksh Optifibre (NSE:AKSHOPTFBR) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at Aksh Optifibre (NSE:AKSHOPTFBR) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Aksh Optifibre is:

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

0.19 = ₹269m ÷ (₹4.8b - ₹3.4b) (Based on the trailing twelve months to March 2022).

Thus, Aksh Optifibre has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 12% it's much better.

See our latest analysis for Aksh Optifibre

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

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Aksh Optifibre. We found that the returns on capital employed over the last five years have risen by 230%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Aksh Optifibre appears to been achieving more with less, since the business is using 71% less capital to run its operation. Aksh Optifibre may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 70% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Aksh Optifibre's ROCE

In the end, Aksh Optifibre has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 50% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Aksh Optifibre does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Aksh Optifibre 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. 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.