Returns On Capital At AVG Logistics (NSE:AVG) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at AVG Logistics (NSE:AVG), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for AVG Logistics:

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

0.096 = ₹115m ÷ (₹2.5b - ₹1.3b) (Based on the trailing twelve months to September 2021).

Therefore, AVG Logistics has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Transportation industry average of 11%.

Check out the opportunities and risks within the IN Transportation industry.

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 want to delve into the historical earnings, revenue and cash flow of AVG Logistics, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at AVG Logistics doesn't inspire confidence. To be more specific, ROCE has fallen from 32% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that AVG Logistics has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From AVG Logistics' ROCE

While returns have fallen for AVG Logistics 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 followed suit returning a meaningful 53% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for AVG Logistics (of which 2 are a bit concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.