Some Investors May Be Worried About Kaynes Technology India's (NSE:KAYNES) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Kaynes Technology India (NSE:KAYNES) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Kaynes Technology India:

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

0.091 = ₹2.3b ÷ (₹33b - ₹7.4b) (Based on the trailing twelve months to March 2024).

Therefore, Kaynes Technology India has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 15%.

See our latest analysis for Kaynes Technology India

Above you can see how the current ROCE for Kaynes Technology India compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Kaynes Technology India .

The Trend Of ROCE

We weren't thrilled with the trend because Kaynes Technology India's ROCE has reduced by 61% over the last five years, while the business employed 1,802% more capital. Usually this isn't ideal, but given Kaynes Technology India conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Kaynes Technology India probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Kaynes Technology India has decreased its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kaynes Technology India. And the stock has done incredibly well with a 160% return over the last year, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Kaynes Technology India we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Kaynes Technology India 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.

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