The Trends At Adani Ports and Special Economic Zone (NSE:ADANIPORTS) That You Should Know About

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Adani Ports and Special Economic Zone (NSE:ADANIPORTS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Adani Ports and Special Economic Zone, this is the formula:

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

0.085 = ₹55b ÷ (₹715b - ₹70b) (Based on the trailing twelve months to December 2020).

Therefore, Adani Ports and Special Economic Zone has an ROCE of 8.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

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 to see what analysts are forecasting going forward, you should check out our free report for Adani Ports and Special Economic Zone.

What Does the ROCE Trend For Adani Ports and Special Economic Zone Tell Us?

When we looked at the ROCE trend at Adani Ports and Special Economic Zone, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like Adani Ports and Special Economic Zone might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Adani Ports and Special Economic Zone has decreased its current liabilities to 9.9% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Adani Ports and Special Economic Zone's ROCE

To conclude, we've found that Adani Ports and Special Economic Zone is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 230% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Adani Ports and Special Economic Zone, we've discovered 3 warning signs that you should be aware of.

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This article by Simply Wall St is general in nature. 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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