Capital Allocation Trends At Adani Ports and Special Economic Zone (NSE:ADANIPORTS) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Adani Ports and Special Economic Zone (NSE:ADANIPORTS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Adani Ports and Special Economic Zone:

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

0.098 = ₹71b ÷ (₹843b - ₹112b) (Based on the trailing twelve months to September 2021).

Therefore, Adani Ports and Special Economic Zone has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 11%.

See our latest analysis for Adani Ports and Special Economic Zone

In the above chart we have measured Adani Ports and Special Economic Zone's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Adani Ports and Special Economic Zone here for free.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Adani Ports and Special Economic Zone's ROCE has reduced by 20% over the last five years, while the business employed 126% more capital. That being said, Adani Ports and Special Economic Zone raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Adani Ports and Special Economic Zone might not have received a full period of earnings contribution from it.

The Bottom Line

While returns have fallen for Adani Ports and Special Economic Zone in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 147% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Adani Ports and Special Economic Zone does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Adani Ports and Special Economic Zone may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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