Returns Are Gaining Momentum At Aksh Optifibre (NSE:AKSHOPTFBR)

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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 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 Aksh Optifibre is:

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

0.15 = ₹166m ÷ (₹3.8b - ₹2.7b) (Based on the trailing twelve months to June 2023).

So, Aksh Optifibre has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Communications industry average of 17%.

View our latest analysis for Aksh Optifibre

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aksh Optifibre's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Aksh Optifibre, check out these free graphs here.

What Does the ROCE Trend For Aksh Optifibre Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Aksh Optifibre. The figures show that over the last five years, returns on capital have grown by 73%. 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 81% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 71% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In the end, Aksh Optifibre has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 57% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 3 warning signs we've spotted with Aksh Optifibre (including 1 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.