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. 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 AVG Logistics (NSE:AVG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 AVG Logistics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = ₹110m ÷ (₹2.1b - ₹917m) (Based on the trailing twelve months to September 2020).
Therefore, AVG Logistics has an ROCE of 9.7%. On its own, that's a low figure but it's around the 9.1% average generated by the Transportation industry.
Check out our latest analysis for AVG Logistics
Historical performance is a great place to start when researching a stock so above you can see the gauge for AVG Logistics' ROCE against it's prior returns. If you'd like to look at how AVG Logistics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is AVG Logistics' ROCE Trending?
When we looked at the ROCE trend at AVG Logistics, we didn't gain much confidence. To be more specific, ROCE has fallen from 33% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Another thing to note, AVG Logistics has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In summary, AVG Logistics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 62% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
AVG Logistics does have some risks, we noticed 5 warning signs (and 3 which are significant) we think you should know about.
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. 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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About NSEI:AVG
Proven track record with adequate balance sheet.
