There Are Reasons To Feel Uneasy About Adani Ports and Special Economic Zone's (NSE:ADANIPORTS) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Adani Ports and Special Economic Zone (NSE:ADANIPORTS) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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)

0.089 = ₹74b ÷ (₹949b - ₹111b) (Based on the trailing twelve months to June 2022).

So, Adani Ports and Special Economic Zone has an ROCE of 8.9%. On its own, that's a low figure but it's around the 7.5% average generated by the Infrastructure industry.

View our latest analysis for Adani Ports and Special Economic Zone

Above you can see how the current ROCE for Adani Ports and Special Economic Zone compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Adani Ports and Special Economic Zone here for free.

So How Is Adani Ports and Special Economic Zone's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 126%. 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Adani Ports and Special Economic Zone's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

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

Bringing it all together, while we're somewhat encouraged by Adani Ports and Special Economic Zone's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 124% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Adani Ports and Special Economic Zone does come with some risks, and we've found 3 warning signs that you should be aware of.

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.